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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.

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  • 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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    1. Redistributing the Gains From Trade Through Progressive Taxation
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    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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