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Redistributing the Gains from Trade through Progressive Taxation

In: Trade and Labor Markets

Author

Listed:
  • Spencer Lyon
  • Michael Waugh

Abstract

Should a nation's tax system become more progressive as it opens to trade? Does opening to trade change the benefits of a progressive tax system? We answer these question within a standard incomplete markets model with frictional labor markets and Ricardian trade. Consistent with empirical evidence, adverse shocks to comparative advantage lead to labor income losses for import-competition-exposed workers; with incomplete markets, these workers are imperfectly insured and experience welfare losses. A progressive tax system is valuable, as it substitutes for imperfect insurance and redistributes the gains from trade. However, it also reduces the incentives for labor to reallocate away from comparatively disadvantaged locations. We find that optimal progressivity should increase with openness to trade with a ten percentage point increase in openness necessitating a five percentage point increase in marginal tax rates for those at the top of the income distribution.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Spencer Lyon & Michael Waugh, 2017. "Redistributing the Gains from Trade through Progressive Taxation," NBER Chapters, in: Trade and Labor Markets, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberch:14160
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    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Redistributing the Gains From Trade Through Progressive Taxation
      by Christian Zimmermann in NEP-DGE blog on 2018-10-17 19:54:28

    Citations

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    Cited by:

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    2. Kohl, Miriam & Richter, Philipp M., 2023. "Unilateral tax policy in the open economy," Journal of International Economics, Elsevier, vol. 145(C).
    3. Seneviratne, Prathi, 2025. "The unintended consequences of compensating trade’s losers," Economic Modelling, Elsevier, vol. 145(C).
    4. Jalles, João Tovar & Karras, Georgios, 2024. "Tax progressivity and income inequality in the US," Economics Letters, Elsevier, vol. 238(C).
    5. Mi Dai, 2023. "Recent developments on trade and inequality," Journal of Economic Surveys, Wiley Blackwell, vol. 37(5), pages 1636-1659, December.
    6. Miaojie Yu, 2020. "China-US Trade War and Trade Talk," Springer Books, Springer, number 978-981-15-3785-1, January.
    7. Daniel Carroll & Sewon Hur, 2023. "On The Distributional Effects Of International Tariffs," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 64(4), pages 1311-1346, November.
    8. Carroll, Daniel R. & Hur, Sewon, 2020. "On the heterogeneous welfare gains and losses from trade," Journal of Monetary Economics, Elsevier, vol. 109(C), pages 1-16.
    9. Dyrda, Sebastian & Hong, Guangbin & Steinberg, Joseph B., 2024. "Optimal taxation of multinational enterprises: A Ramsey approach," Journal of Monetary Economics, Elsevier, vol. 141(C), pages 74-97.
    10. German Cubas & Pedro Silos & Vesa Soini, 2021. "Risk and the Misallocation of Human Capital," DETU Working Papers 2103, Department of Economics, Temple University.
    11. Ning Jia & Raven Molloy & Christopher Smith & Abigail Wozniak, 2023. "The Economics of Internal Migration: Advances and Policy Questions," Journal of Economic Literature, American Economic Association, vol. 61(1), pages 144-180, March.

    More about this item

    JEL classification:

    • E1 - Macroeconomics and Monetary Economics - - General Aggregative Models
    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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