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Anti-Trade Agitation and Distribution-Neutral Tax Policy- An Elementary Framework

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  • Marjit, Sugata

Abstract

The recent Brexit episode is being interpreted in some quarters as an anti-globalisation backlash. Free trade does not promise gains for all without a proper compensating mechanism that allows winners to bribe the losers. Also standard prediction of trade theory does point towards increasing wage inequality for the relatively skill abundant developed world. Theoretical discussion on compensating mechanism that addresses inequality is rare in trade literature. In a simple HOS model we consider tax policies that keep the pre-trade degree of inequality unchanged between skilled and unskilled workers. We discuss the problem of existence of such an inequality-neutral tax rate that generates a positive increment in the after tax skilled wage. Existence of such a mechanism is contingent on the initial degree of inequality and is independent of whether the tax is progressive or proportional.

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  • Marjit, Sugata, 2016. "Anti-Trade Agitation and Distribution-Neutral Tax Policy- An Elementary Framework," MPRA Paper 73110, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:73110
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    More about this item

    Keywords

    Trade Model; Wage inequality; Compensation mechanism; Tax policy.;
    All these keywords.

    JEL classification:

    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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