IDEAS home Printed from
MyIDEAS: Log in (now much improved!) to save this article

Income taxes as reciprocal tariffs

Listed author(s):
  • W. Michael Cox
  • David M. Gould
  • Roy J. Ruffin

This article shows the equivalence between tariffs on international trade and income taxation. Traditionally, income taxes have been seen as lowering society's output through the household's labor-leisure trade-off. Income taxes also reduce the degree to which individuals specialize in market activity, which is similar to the way countries respond to tariffs in international trade. Income taxes discourage individuals from specializing in activities that reflect their comparative advantage. In so doing, income taxes may have their most distorting effects, not by encouraging individuals to work less but by causing them to spend more time working at endeavors for which their talent is limited. Using a general model of interpersonal exchange, the authors demonstrate parallels between income taxes and tariffs. Over a range of income taxes, raising taxes can benefit large groups of similarly skilled individuals and hurt small groups. As in tariff theory, the costs of income taxes are small only if they succeed in raising revenue. Thus, it is very costly for an economy to be on the downward portion of its tax revenue (Laffer) curve. The more heterogeneous the society, the higher the income tax rate that will maximize tax revenues. By overlooking the effects of heterogeneity in the workforce and the potential for workers to flee to home production, policymakers may under- or overestimate the effects of income taxes on various sectors of the economy and tax with unintended consequences.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL:
Download Restriction: no

Article provided by Federal Reserve Bank of Dallas in its journal Economic and Financial Policy Review.

Volume (Year): (1998)
Issue (Month): Q III ()
Pages: 2-9

in new window

Handle: RePEc:fip:fedder:y:1998:i:qiii:p:2-9
Contact details of provider: Web page:

More information through EDIRC

Order Information: Email:

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.:

in new window

  1. Juster, F Thomas & Stafford, Frank P, 1991. "The Allocation of Time: Empirical Findings, Behavioral Models, and Problems of Measurement," Journal of Economic Literature, American Economic Association, vol. 29(2), pages 471-522, June.
  2. McGrattan, Ellen R & Rogerson, Richard & Wright, Randall, 1997. "An Equilibrium Model of the Business Cycle with Household Production and Fiscal Policy," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 38(2), pages 267-290, May.
  3. Boskin, Michael J., 1975. "Efficiency aspects of the differential tax treatment of market and household economic activity," Journal of Public Economics, Elsevier, vol. 4(1), pages 1-25, February.
  4. Sandmo, Agnar, 1990. "Tax Distortions and Household Production," Oxford Economic Papers, Oxford University Press, vol. 42(1), pages 78-90, January.
  5. Roy Ruffin, 1979. "Border tax adjustments and countervailing duties," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 115(2), pages 351-355, June.
  6. Eisner, Robert, 1989. "The Total Incomes System of Accounts," University of Chicago Press Economics Books, University of Chicago Press, edition 1, number 9780226196381, Summer.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:fip:fedder:y:1998:i:qiii:p:2-9. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Amy Chapman)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.