Inequality and Relative Reliance on Tariffs: Theory and Evidence
AbstractIn 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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Bibliographic InfoPaper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 1457.
Date of creation: 2005
Date of revision:
inequality; tariffs; median-voter; trade; vertical differentiation;
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:
- NEP-ALL-2005-04-30 (All new papers)
- NEP-INT-2005-04-30 (International Trade)
- NEP-POL-2005-04-30 (Positive Political Economics)
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