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Redistributing the Gains From Trade Through Progressive Taxation

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  • Mike Waugh

    (New York University)

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 loses 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 to work and for labor to reallocate away from comparatively disadvantaged locations. We find that progressivity should increase with openness to trade and that progressivity is an important tool to mitigate the negative consequences of globalization.

Suggested Citation

  • Mike Waugh, 2018. "Redistributing the Gains From Trade Through Progressive Taxation," 2018 Meeting Papers 1210, Society for Economic Dynamics.
  • Handle: RePEc:red:sed018:1210
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    File URL: https://economicdynamics.org/meetpapers/2018/paper_1210.pdf
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    References listed on IDEAS

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    1. Gueorgui Kambourov, 2009. "Labour Market Regulations and the Sectoral Reallocation of Workers: The Case of Trade Reforms," Review of Economic Studies, Oxford University Press, vol. 76(4), pages 1321-1358.
    2. A. Kerem Co?ar & Nezih Guner & James Tybout, 2016. "Firm Dynamics, Job Turnover, and Wage Distributions in an Open Economy," American Economic Review, American Economic Association, vol. 106(3), pages 625-663, March.
    3. repec:eee:inecon:v:108:y:2017:i:c:p:387-412 is not listed on IDEAS
    4. Lorenzo CALIENDO & Maximiliano DVORKIN & Fernando PARRO, 2016. "Trade and Labor Market Dynamics," Discussion papers 16050, Research Institute of Economy, Trade and Industry (RIETI).
    5. Antràs, Pol & de Gortari, Alonso & Itskhoki, Oleg, 2017. "Globalization, inequality and welfare," Journal of International Economics, Elsevier, vol. 108(C), pages 387-412.
    6. Dani Rodrik, 1997. "Has Globalization Gone Too Far?," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 57.
    7. Mario J. Miranda & Paul L. Fackler, 2004. "Applied Computational Economics and Finance," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262633094, January.
    8. Cochrane, John H, 1991. "A Simple Test of Consumption Insurance," Journal of Political Economy, University of Chicago Press, vol. 99(5), pages 957-976, October.
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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

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