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Can taxes help ensure a fair globalization?

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  • Langot, François
  • Merola, Rossana
  • Oh, Samil

Abstract

This paper analyzes whether taxation can be successfully used to reduce the incidence of labor informality and achieve higher equality in a globalized economy. To this purpose, it develops a two-area model: a developed country and an emerging country. The two areas differ according to the size of the informal sector, which is characterized by a more flexible labor market and lower productivity. To illustrate the potential role of taxation in achieving a more fair income distribution, the paper introduces a trade shock to simulate the effects of trade liberalization. Trade expansion has often been blamed for leading to an expansion of the informal sector and a widening of wage income disparities. In this context, the paper analyzes whether a budget-neutral tax reform – switching the tax burden from payroll taxes paid by firms operating in the formal sector to a consumption tax – can mitigate possible adverse effects of trade liberalization and support labor formalization. The effects of taxation are seen in the context of the trade-offs between growth, labor formality and equity. The analysis suggests that small improvements in formalization, resulting from the tax reform, come at the cost of widening income inequality. To reduce the incidence of low-quality jobs, tax policy interventions should go hand in hand with more effective social protection systems and labor laws.

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  • Langot, François & Merola, Rossana & Oh, Samil, 2022. "Can taxes help ensure a fair globalization?," International Economics, Elsevier, vol. 171(C), pages 191-213.
  • Handle: RePEc:eee:inteco:v:171:y:2022:i:c:p:191-213
    DOI: 10.1016/j.inteco.2022.06.003
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    2. Bratanova, Alexandra & Cameron, Alicia & Thavat, Maylee & Fyfield, Amelia & Hajkowicz, Stefan, 2023. "Priority setting in international trade – application of multiple criteria decision analysis for Australian-Indonesia trade in the health sector," MPRA Paper 119407, University Library of Munich, Germany.

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    More about this item

    Keywords

    Informal sector; Taxation; Income distribution; Trade liberalization; DSGE models;
    All these keywords.

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions
    • F62 - International Economics - - Economic Impacts of Globalization - - - Macroeconomic Impacts
    • F66 - International Economics - - Economic Impacts of Globalization - - - Labor
    • J45 - Labor and Demographic Economics - - Particular Labor Markets - - - Public Sector Labor Markets
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue

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