The Redistributional Consequences of Tax Reform Under Financial Integration

Ayşe Kabukçuoğlu Dur

Koç University-TUSIAD Economic Research Forum Working Papers from Koc University-TUSIAD Economic Research Forum

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.

Keywords: Heterogeneous agents and incomplete markets; taxation; financial integration. (search for similar items in EconPapers)
JEL-codes: D52 E62 F41 F68 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2014-08
New Economics Papers: this item is included in nep-dge, nep-mac, nep-pbe and nep-pub
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Working Paper: The redistributional consequences of tax reform under financial integration (2014)
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