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ABSTRACT This paper first investigates a relationship between economic growth and income inequality using U.S. states data, a state cost-of-living deflator, and nonlinearity. It then explores the distribution of income gains among different income groups. We find that the impact of inequality on growth is nonlinear. Lowering inequality or increasing it substantially reduces growth; thus stable inequality may be good for growth. Economic growth affects incomes of the poor, the middle-income group, and the rich similarly with the elasticity of one. Education and labor market policies become important in promoting growth and improving income gains of the poor. [ABSTRACT FROM AUTHOR]