Redistributing the Gains From Trade Through Progressive Taxation

Spencer G. Lyon and Michael Waugh

No 24784, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Should a nation's tax system become more progressive as it opens to trade? Does opening to trade change the benefits of a progressive tax system? We answer these question within a standard incomplete markets model with frictional labor markets and Ricardian trade. Consistent with empirical evidence, adverse shocks to comparative advantage lead to labor income losses for import-competition-exposed workers; with incomplete markets, these workers are imperfectly insured and experience welfare losses. A progressive tax system is valuable, as it substitutes for imperfect insurance and redistributes the gains from trade. However, it also reduces the incentives for labor to reallocate away from comparatively disadvantaged locations. We find that optimal progressivity should increase with openness to trade with a ten percentage point increase in openness necessitating a five percentage point increase in marginal tax rates for those at the top of the income distribution.

JEL-codes: E1 F11 H21 (search for similar items in EconPapers)
Date: 2018-06
New Economics Papers: this item is included in nep-dge, nep-int, nep-mac, nep-pbe and nep-pub
Note: EFG ITI PE
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Citations: View citations in EconPapers (14)

Published as Redistributing the Gains from Trade through Progressive Taxation , Spencer Lyon, Michael Waugh. in Trade and Labor Markets , Hanson and Redding. 2019
Published as Spencer G. Lyon & Michael E. Waugh, 2018. "Redistributing the gains from trade through progressive taxation," Journal of International Economics, vol 115, pages 185-202.

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Journal Article: Redistributing the gains from trade through progressive taxation (2018)
Working Paper: Redistributing the Gains From Trade Through Progressive Taxation (2018)
Chapter: Redistributing the Gains from Trade through Progressive Taxation (2017)
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