Federal Reserve Bank of Dallas
Globalization Institute Working Papers
The redistributional consequences of tax reform under financial integration
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.
Cite this item
Ayse Kabukcuoglu, The redistributional consequences of tax reform under financial integration, Federal Reserve Bank of Dallas, Globalization Institute Working Papers 188, 01 Aug 2014.
- D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
- E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
- F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
- F68 - International Economics - - Economic Impacts of Globalization - - - Policy
Keywords: tax reform; welfare
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