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Unilateral Tax Policy in the Open Economy

Referierte Aufsätze Web of Science

Miriam Kohl, Philipp M. Richter

In: Journal of International Economics 145 (2023), 103829, 22 S.

Abstract

This paper examines the effects of a unilateral reform of a redistributive tax-transfer system in an open economy. Compared to autarky, a tax increase leads to a smaller decline in aggregate income in the open economy, and it is also more effective at reducing income inequality, provided the tax rates are sufficiently low. Aggregating effects on income and income inequality using an Atkinson social welfare function, we find that optimal tax rates are positive in the open economy and higher than under autarky. The key mechanism is 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 in line with a terms-of-trade improvement. From the perspective of a non-reforming trading partner, this resembles a unilateral increase in trade costs leading to a deterioration of terms of trade and a decline in aggregate real income and inequality.



JEL-Classification: D31;F12;F16;H24
Keywords: Income inequality, redistribution, international trade, heterogeneous firms
DOI:
https://doi.org/10.1016/j.jinteco.2023.103829

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