Inequality and Relative Reliance on Tariffs: Theory and Evidence

Margarita Katsimi and Thomas Moutos

No 1457, CESifo Working Paper Series from CESifo

Abstract: In this paper we construct a Ricardian model of trade in vertically-differentiated products between a developing country and the (developed) rest of the world. Despite labour being the only factor of production in this model, tariffs (in addition to income taxes) have distributional consequences because the high-quality imported varieties are consumed only by high-income households. The model predicts a U-shaped relationship between income inequality and the median-voter’s preferred reliance on tariffs versus income taxes in order to effect the desired redistribution. Using data from 44 countries we test for the existence of this U-shaped relationship by estimating a cross-sectional regression relating the ratio of the tariff rate over the tax rate to inequality and a set of control variables such as GDP per capita, openness, the degree of democracy and area dummies. We find that the model’s predictions are supported by the data.

Keywords: inequality; tariffs; median-voter; trade; vertical differentiation (search for similar items in EconPapers)
JEL-codes: F13 H23 (search for similar items in EconPapers)
Date: 2005
New Economics Papers: this item is included in nep-int and nep-pol
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_1457

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