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Inequality and Relative Reliance on Tariffs: Theory and Evidence

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Author Info
Margarita Katsimi ()
Thomas Moutos ()

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Abstract

In this paper we construct a Ricardian model of trade in vertically-differentiated products between a developing country and the (developed) rest of the world. Despite labour being the only factor of production in this model, tariffs (in addition to income taxes) have distributional consequences because the high-quality imported varieties are consumed only by high-income households. The model predicts a U-shaped relationship between income inequality and the median-voter’s preferred reliance on tariffs versus income taxes in order to effect the desired redistribution. Using data from 44 countries we test for the existence of this U-shaped relationship by estimating a cross-sectional regression relating the ratio of the tariff rate over the tax rate to inequality and a set of control variables such as GDP per capita, openness, the degree of democracy and area dummies. We find that the model’s predictions are supported by the data.

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Paper provided by CESifo GmbH in its series CESifo Working Paper Series with number CESifo Working Paper No. 1457.

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Date of creation: 2005
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Handle: RePEc:ces:ceswps:_1457

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Related research
Keywords: inequality tariffs median-voter trade vertical differentiation

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Find related papers by JEL classification:
F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies

This paper has been announced in the following NEP Reports:

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    Other versions:
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Margarita Katsimi & Thomas Moutos, 2006. "Inequality and the US Import Demand Function," CESifo Working Paper Series CESifo Working Paper No. , CESifo GmbH. [Downloadable!]
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