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On the Distributional Effects of International Tariffs

Author

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  • Daniel R. Carroll
  • Sewon Hur

Abstract

What are the distributional consequences of tariffs? We build a trade model with incomplete asset markets and households that are heterogeneous in their income, wealth, and labor skill. We increase tariffs by 5 percentage points and examine several budget-neutral fiscal policies for redistributing tariff revenue. Without redistribution, tariffs hurt all households, but higher tradables prices disproportionately harm the poor and the ensuing decline in the skill premium disproportionately harms the skilled. With redistribution, lowering the labor income tax leads to lower economic activity but higher average welfare relative to lowering the capital income tax; nevertheless, both policies reduce average welfare with retaliatory tariffs. Finally, when tariff revenue is rebated to households as lump-sum transfers, tariffs can be welfare improving even with full retaliation.

Suggested Citation

  • Daniel R. Carroll & Sewon Hur, 2020. "On the Distributional Effects of International Tariffs," Working Papers 202018, Federal Reserve Bank of Cleveland.
    • Handle: RePEc:fip:fedcwq:88201
    DOI: 10.26509/frbc-wp-202018
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    File URL: https://doi.org/10.26509/frbc-wp-202018
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    References listed on IDEAS

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    Cited by:

    1. David Kohn & Fernando Leibovici & Michal Szkup, 2020. "No Credit, No Gain: Trade Liberalization Dynamics, Production Inputs, and Financial Development," Working Papers 2020-038, Federal Reserve Bank of St. Louis, revised Dec 2020.
    2. Michael E. Waugh, 2019. "The Consumption Response to Trade Shocks: Evidence from the US-China Trade War," NBER Working Papers 26353, National Bureau of Economic Research, Inc.
    3. 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.
    4. Sewon Hur, 2020. "The Distributional Effects of COVID-19 and Optimal Mitigation Policies," Globalization Institute Working Papers 400, Federal Reserve Bank of Dallas, revised 23 Oct 2020.

    More about this item

    Keywords

    tariffs; consumption; taxation; inequality; welfare;

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • F10 - International Economics - - Trade - - - General
    • F62 - International Economics - - Economic Impacts of Globalization - - - Macroeconomic Impacts
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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