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Thursday, October 4, 2018 at 11:40am to 1:10pm
Uris Hall, 498
Ali Shourideh - Carnegie Mellon University
Inequality, Redistribution, and Optimal Trade Policy: A Public Finance Approach (joint w/Roozbeh Hosseini)
Abstract: In this paper, we explore the relationship between optimal trade and redistributive policies. In particular, in an environment with input-output linkages where international trade affects the relative wages and the reallocation of workers across various sectors is frictional, we study how income taxes and trade policies should be designed in order to balance the efficiency gains from trade with the costs associated with the resulting increased inequality. We show that when personal income taxes can depend on workers sectoral choices, free trade is optimal. However, when personal income tax only depend on income, production must be distorted. We show that these distortions have two general properties: first, they are independent of the network structure of trade and trade elasticities; second, they must take the form of value-added taxes (VAT). Finally, in a quantitative version of our model, we show that sector-specific transfers must be large and absent such taxes, distortion to trade are significant. These results have implications for design of trade assistance programs and trade agreements.