TY  - JOUR
AU  - Lyon, Spencer G
AU  - Waugh, Michael E
TI  - Redistributing the Gains From Trade Through Progressive Taxation
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 24784
PY  - 2018
Y2  - June 2018
DO  - 10.3386/w24784
UR  - http://www.nber.org/papers/w24784
L1  - http://www.nber.org/papers/w24784.pdf
N1  - Author contact info:
Spencer Lyon
NYU Stern School of Business
44 West Fourth Street
New York NY 10012
E-Mail: spencerlyon2@gmail.com

Michael E. Waugh
Stern School of Business
New York University
44 West Fourth Street, Suite 7-160
New York, NY 10012
Tel: 212/998-0288
E-Mail: mwaugh@stern.nyu.edu
M1  - published as Spencer Lyon, Michael Waugh. "Redistributing the Gains from Trade through Progressive Taxation," in Gordon H. Hanson and Stephen J. Redding, organizers, "Trade and Labor Markets" Elsevier, Journal of International Economics (2018)

M3  - presented at "Trade and Labor Markets", October 13-14, 2017
AB  - 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.
ER  -