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Federal Reserve Bank of Dallas
Globalization Institute Working Papers
The redistributional consequences of tax reform under financial integration
Ayse Kabukcuoglu
Abstract

I quantify the welfare effects of replacing the US capital income tax with higher labor income taxes under international financial integration using a two-country, heterogeneous-agent incomplete markets model calibrated to represent the US and the rest of the world. Short-run and long-run factor price dynamics are key: after the tax reform, interest rates rise less under financial openness than in autarky. Therefore, wealthy households gain less. Post-tax wages also fall less as a result of the faster capital accumulation, so the poor are hurt less. Hence, the distributional impacts of the reform are significantly dampened relative to autarky although a majority of households prefer the status quo. Aggregate welfare effect to the US is a permanent 0.2% consumption equivalent loss under financial openness which is roughly 15% of the welfare loss under autarky.


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Ayse Kabukcuoglu, The redistributional consequences of tax reform under financial integration, Federal Reserve Bank of Dallas, Globalization Institute Working Papers 188, 01 Aug 2014.
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Keywords: tax reform; welfare
DOI: 10.24149/gwp188
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