Inequality, Taxation, and Sovereign Default Risk

Minjie Deng

American Economic Journal: Macroeconomics, 2024, vol. 16, issue 2, 217-49

Abstract: Income inequality and worker migration significantly affect sovereign default risk. Governments often impose progressive taxes to reduce inequality, which redistribute income but discourage labor supply and induce emigration. Reduced labor supply and a smaller high-income workforce erode the current and future tax base, reducing government's ability to repay debt. I develop a sovereign default model with endogenous nonlinear taxation and heterogeneous labor to quantify this effect. In the model, the government chooses the optimal combination of taxation and debt, considering its impact on workers' labor and migration decisions. Income inequality accounts for one-fifth of the average US state government spread.

JEL-codes: D31 F34 H21 H23 H74 J61 R23 (search for similar items in EconPapers)
Date: 2024
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Working Paper: Inequality, Taxation, and Sovereign Default Risk (2021)
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DOI: 10.1257/mac.20210133

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