Unilateral tax policy in the open economy

Miriam Kohl and Philipp Richter ()

No 05/21, CEPIE Working Papers from Technische Universität Dresden, Center of Public and International Economics (CEPIE)

Abstract: This paper examines the effects of a unilateral reform of the redistribution policy in an economy open to international trade. We set up a general equilibrium trade model with heterogeneous agents allowing for country asymmetries. We show that under international trade compared to autarky, a unilateral tax increase leads to a less pronounced decline in aggregate real income in the reforming country, while income inequality is reduced to a larger extent for sufficiently small initial tax rates. We highlight as a key mechanism a tax-induced reduction in the market size of the reforming country relative to its trading partner, resulting in a firm selection effect towards exporting. From the perspective of a non-reforming trading partner, the unilateral redistribution policy reform resembles a unilateral increase in trade costs leading to a deterioration of terms-of-trade and a decline in both aggregate real income and inequality.

Keywords: Income inequality; Redistribution; International trade; Heterogeneous firms (search for similar items in EconPapers)
JEL-codes: D31 F12 F16 H24 (search for similar items in EconPapers)
Date: 2021
New Economics Papers: this item is included in nep-cwa, nep-int, nep-opm and nep-pub
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https://www.econstor.eu/bitstream/10419/242941/1/1771646969.pdf (application/pdf)

Related works:
Journal Article: Unilateral tax policy in the open economy (2023)
Working Paper: Unilateral Tax Policy in the Open Economy (2021)
Working Paper: Unilateral Tax Policy in the Open Economy (2021)
Working Paper: Unilateral Tax Policy in the Open Economy (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:tudcep:0521

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