Abstract
In this chapter, we study permutations of our baseline model to explore the implications of alternative assumptions about how labor markets work and how tariff government revenue is redistributed across households. In Sect. 6.1 we discuss a version of the model without labor markets and another with imperfectly mobile labor markets. In Sect. 6.2, we consider versions of the tax scheme where the tariff revenue loss has no effect on households and another model where the income tax that compensates for the revenue losses is raised via progressive taxation.
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Notes
- 1.
Please see ALP for a detailed discussion and a formal derivation of the equations.
- 2.
The timing assumption is not critical, and we simply follow the timing convention of previous research.
- 3.
In short, we impose the non-traded goods prices into χ t and solve for the remaining equilibrium wages, \(w^g_{t+n}\), and prices, \(p^g_{t+n}\) for every n ≥ 0.
- 4.
Because of data constraints, in what follows we assume that households supply one unit of labor to the formal labor market inelastically. As a result, the expected wage of a worker is the expected wage of the household.
- 5.
To better elaborate on this point, the argument is the following. To first order, the dynamic adjustment of the household, in terms of consumption and production decisions, can be ignored. As a result, this first order approximation does have an error, but this error (which includes dynamic adjustments) is small (under the standard assumption that households are optimizing consumption and production decisions). The adjustment of wages is instead a first order effect and, consequently, not including it leads to first order errors. See Porto (2006).
- 6.
- 7.
These measures are adjusted for allowances/deductions, tax credits, significant local taxes, and other main rules of the tax code. They are not, however, adjusted for deductions, exemptions, and credits that depend on taxpayer specific characteristics (for example, no adjustment is made for child credits). They also do not account for evasion and/or avoidance.
- 8.
This formula can be thought of as a crude approximation to the tax function R(y) = y − λy 1−ψ.
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Artuc, E., Porto, G., Rijkers, B. (2022). Alternative Models. In: The Inequality Adjusted Gains from Trade. Economic Studies in Inequality, Social Exclusion and Well-Being. Springer, Cham. https://doi.org/10.1007/978-3-030-93060-8_6
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