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Globalization, income tax structure and the redistribution–progressivity tradeoff

Joel Hellier

No 464, Working Papers from ECINEQ, Society for the Study of Economic Inequality

Abstract: We build a simple model in which (i) households select their country of residence depending on income taxation and on the cost of migrating and living abroad, and (ii) globalization comes with a decrease in the cost of migration. Globalization leads to (i) a maximum between-country income-tax gap which is lower for the high incomes, (ii) a decrease in income tax rates and (iii) a convergence in the taxation structures of the different countries. In addition, globalization generates changes in income tax schedules and redistribution which display three successive stages. In the first stage, the redistribution goal is consistent with tax progressivity. In the second stage, the tax schedule becomes regressive at the top. Thirdly, if the migration cost continues to decline, the government can typically not achieve its redistribution goal, even if redistribution is its first priority, and there is no equilibrium taxation schedule, the tax structure becoming volatile. These results are in line with observed facts. Finally, the model shows that globalization tends to generate and magnify a trade-off between less redistribution and less tax progressivity. This provides an explanation for the middle class curse and the social democrat curse experienced by a large majority of advanced countries over the last three decades.

Keywords: globalization; income tax; migration; progressivity; redistribution; tax competition. (search for similar items in EconPapers)
JEL-codes: F22 H23 H24 H26 I38 (search for similar items in EconPapers)
Pages: 29 pages
Date: 2018-04
New Economics Papers: this item is included in nep-int, nep-mig and nep-pbe
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Handle: RePEc:inq:inqwps:ecineq2018-464