Anti-Trade Agitation and Distribution-Neutral Tax Policy- An Elementary Framework

Marjit, Sugata (2016): Anti-Trade Agitation and Distribution-Neutral Tax Policy- An Elementary Framework.

Abstract

The recent Brexit episode is being interpreted in some quarters as an anti-globalisation backlash. Free trade does not promise gains for all without a proper compensating mechanism that allows winners to bribe the losers. Also standard prediction of trade theory does point towards increasing wage inequality for the relatively skill abundant developed world. Theoretical discussion on compensating mechanism that addresses inequality is rare in trade literature. In a simple HOS model we consider tax policies that keep the pre-trade degree of inequality unchanged between skilled and unskilled workers. We discuss the problem of existence of such an inequality-neutral tax rate that generates a positive increment in the after tax skilled wage. Existence of such a mechanism is contingent on the initial degree of inequality and is independent of whether the tax is progressive or proportional.

• Item Type: MPRA Paper
• Language: English
• Keywords: Trade Model, Wage inequality, Compensation mechanism, Tax policy.
• Subjects: D - Microeconomics > D6 - Welfare Economics > D63 - Equity, Justice, Inequality, and Other Normative Criteria and Measurement; F - International Economics > F1 - Trade > F11 - Neoclassical Models of Trade; H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H20 - General; H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H23 - Externalities ; Redistributive Effects ; Environmental Taxes and Subsidies; J - Labor and Demographic Economics > J3 - Wages, Compensation, and Labor Costs > J31 - Wage Level and Structure ; Wage Differentials

References

Antras, Pol, Alonso de Gortari, and Oleg Itskhoki. "Inequality, Costly Redistribution and Welfare in an Open Economy." (2015).Working paper, Harvard University

Atkinson, Anthony B. "Factor shares: The principal problem of political economy?" Oxford Review of Economic Policy 25.1 (2009): 3-16.

Atkinson, Anthony B. "The changing distribution of income: Evidence and explanations." German Economic Review 1.1 (2000): 3-18.

Bandyopadhyay, Subhayu, Sugata Marjit, and Lei Yang. "International oligopoly, barriers to outsourcing and domestic employment." Canadian Journal of Economics 47.4 (2014): 1372-1386.

Chakrabarti, Avik. "Asymmetric adjustment costs in simple general equilibrium models." European Economic Review 48.1 (2004): 63-73.

Davis, Donald R. "Does European unemployment prop up American wages? National labor markets and global trade." American Economic Review (1998): 478-494.

Davis, Donald R., and James Harrigan. "Good jobs, bad jobs, and trade liberalization." Journal of International Economics 84.1 (2011): 26-36.

Feenstra, Robert C. ‘’Offshoring in the global economy: microeconomic structure and macroeconomic implications.’’ Cambridge, MA: MIT Press, 2010

Feenstra, Robert, and Gordon Hanson. ‘’Global production sharing and rising inequality: A survey of trade and wages.’’ No. w8372. National Bureau of Economic Research, 2001.

Jones, Ronald W., and Stanley L. Engerman. "Trade, technology, and wages: a tale of two countries." The American Economic Review 86.2 (1996): 35-40.

Krugman, Paul R. "Technology, trade and factor prices." Journal of international Economics 50.1 (2000): 51-71.

Krugman, Paul R. "Trade and wages, reconsidered." Brookings Papers on Economic Activity 2008.1 (2008): 103-154.

Marjit, Sugata, Hamid Beladi, and Avik Chakrabarti. "Trade and wage inequality in developing countries." Economic Inquiry 42.2 (2004): 295-303.

Marjit S. and Arijit Mukherjee ."International outsourcing and R&D: long run implications for consumers." Review of International Economics (2008)Vol. 16, pp. 1010 -1022.