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The Redistributional Consequences of Tax Reform Under Financial Integration

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  • Ayse Kabukcuoglu

    (Department of Economics, Koc University)

Abstract

I quantify the welfare effects of replacing the US capital income tax with higher labor income taxes under international financial integration using a two-country, heterogeneous-agent incomplete markets model calibrated to represent the US and the rest of the world. Short-run and long-run factor price dynamics are key: after the tax reform, interest rates rise less under financial openness than in autarky. Therefore, wealthy households gain less. Post-tax wages also fall less as a result of the faster capital accumulation, so the poor are hurt less. Hence, the distributional impacts of the reform are significantly dampened relative to autarky although a majority of households prefer the status quo. Aggregate welfare effect to the US is a permanent 0.2% consumption equivalent loss under financial openness which is roughly 15% of the welfare loss under autarky.

Suggested Citation

  • Ayse Kabukcuoglu, 2014. "The Redistributional Consequences of Tax Reform Under Financial Integration," Koç University-TUSIAD Economic Research Forum Working Papers 1418, Koc University-TUSIAD Economic Research Forum.
  • Handle: RePEc:koc:wpaper:1418
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    More about this item

    Keywords

    Heterogeneous agents and incomplete markets; taxation; financial integration.;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • F68 - International Economics - - Economic Impacts of Globalization - - - Policy

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