How Taxes and Real Wage Inflexibility Interact to Make Trade Deficits Addictive: The Tertiary and Quaternary Burdens and Benefits of a Transfer

17 Pages Posted: 21 Jan 2016  

Edward Tower

Duke University - Department of Economics; Chulalongkorn University-Economics Department

Victor Yifan Ye

Duke University, Department of Economics, Students

Date Written: January 9, 2016

Abstract

Previous articles on the transfer problem pay scant attention to the problems caused by the distortionary taxation that extracts the gift from the donor nation or the cut in distortionary taxation that bestows the gift to the recipient nation. When combined with inflexibility in the real wage these changes in taxation and the transfer itself impose a considerable burden to the donor matched by a considerable blessing to the recipient. We explore these effects, and conclude that “The Great Rebalancing” between the US and China needed to cure the US trade deficit, i.e. to eliminate the transfer that China is making to the US may bestow a big burden on the US matched by a big blessing for China.

Suggested Citation

Tower, Edward and Ye, Victor Yifan, How Taxes and Real Wage Inflexibility Interact to Make Trade Deficits Addictive: The Tertiary and Quaternary Burdens and Benefits of a Transfer (January 9, 2016). Economic Research Initiatives at Duke (ERID) Working Paper No. 203. Available at SSRN: https://ssrn.com/abstract=2718407 or http://dx.doi.org/10.2139/ssrn.2718407

Edward Tower (Contact Author)

Duke University - Department of Economics ( email )

213 Social Sciences Building
Box 90097
Durham, NC 27708-0204
United States
919-660-1818 (Phone)
919-684-8974 (Fax)

Chulalongkorn University-Economics Department

Bangkok
Thailand

Victor Yifan Ye

Duke University, Department of Economics, Students ( email )

Durham, NC
United States

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