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Optimal Redistribution in an Open Economy

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  • Oleg Itskhoki

    (Harvard University)

Abstract

Conventional wisdom suggests that the optimal policy response to rising income inequality is greater redistribution via higher marginal tax rates and more progressive tax schedules. In this paper we study an economy in which trade is associated with a costly entry into the foreign market, so that only the most productive agents can profitably participate in foreign trade. In this model, trade integration simultaneously leads to rising income inequality and a more sensitive efficiency margin of taxation, both driven by the extensive margin of trade. As a result, the optimal policy response may be to reduce the marginal taxes, thereby further increasing inequality. In order to reap most of the welfare gains from trade, countries may need to accept increasing income inequality.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2009 Meeting Papers with number 967.

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Date of creation: 2009
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Handle: RePEc:red:sed009:967

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  1. Paolo Epifani & Gino Gancia, 2005. "Openness, government size and the terms of trade," Economics Working Papers 915, Department of Economics and Business, Universitat Pompeu Fabra, revised Jan 2008.
  2. Andrew B. Bernard & Jonathan Eaton & J. Bradford Jensen & Samuel Kortum, 2000. "Plants and Productivity in International Trade," Boston University - Institute for Economic Development 105, Boston University, Institute for Economic Development.
  3. Elhanan Helpman & Oleg Itskhoki & Stephen Redding, 2009. "Inequality and Unemployment in a Global Economy," CEP Discussion Papers dp0940, Centre for Economic Performance, LSE.
  4. Attanasio, Orazio & Goldberg, Pinelopi K. & Pavcnik, Nina, 2004. "Trade reforms and wage inequality in Colombia," Journal of Development Economics, Elsevier, vol. 74(2), pages 331-366, August.
  5. Giulia Faggio & Kjell G. Salvanes & John Van Reenen, 2007. "The evolution of inequality in productivity and wages: panel data evidence," LSE Research Online Documents on Economics 4558, London School of Economics and Political Science, LSE Library.
  6. Carl Davidson & Steven Matusz, 2005. "Trade Liberalization and Compensation," International Trade 0503008, EconWPA.
  7. Levinsohn, James, 1999. "Employment responses to international liberalization in Chile," Journal of International Economics, Elsevier, vol. 47(2), pages 321-344, April.
  8. Tuomala, Matti, 1990. "Optimal Income Tax and Redistribution," OUP Catalogue, Oxford University Press, number 9780198286059.
  9. Jonathan Eaton & Samuel Kortum & Francis Kramarz, 2004. "Dissecting Trade: Firms, Industries, and Export Destinations," American Economic Review, American Economic Association, vol. 94(2), pages 150-154, May.
  10. James E. Anderson & Eric van Wincoop, 2004. "Trade Costs," Boston College Working Papers in Economics 593, Boston College Department of Economics.
  11. David Spector, 1999. "Is it Possible to Redistribute the Gains from Trade Using Income Taxation?," Working papers 99-13, Massachusetts Institute of Technology (MIT), Department of Economics.
  12. Elhanan Helpman & Oleg Itskhoki & Stephen Redding, 2008. "Wages, Unemployment and Inequality with Heterogeneous Firms and Workers," NBER Working Papers 14122, National Bureau of Economic Research, Inc.
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Cited by:
  1. Helpman, Elhanan & Itskhoki, Oleg & Redding, Stephen J., 2011. "Trade and Labor Market Outcomes," CEPR Discussion Papers 8191, C.E.P.R. Discussion Papers.
  2. Marco de Pinto, 2012. "Unemployment Benefits as Redistribution Scheme of Trade Gains - a Positive Analysis," FIW Working Paper series 092, FIW.
  3. Marco de Pinto, 2012. "Unemployment Benefits as Redistribution Scheme of Trade Gains - a Positive Analysis," MAGKS Papers on Economics 201210, Philipps-Universit├Ąt Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).

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