Can Taxes Help Ensure a Fair Globalization?

46 Pages Posted: 14 Aug 2019

See all articles by François Langot

François Langot

University of Angers - Centre d'Etudes Prospectives d'Economie Mathematique Appliquees a la Planification (CEPREMAP); Université du Maine - Groupe d' Analyse des Itineraires et Niveaux Salariaux (GAINS); IZA Institute of Labor Economics

Rossana Merola

International Labour Organization (ILO)

Samil Oh

The Bank of Korea

Date Written: August 12, 2019

Abstract

This paper analyzes whether taxation can be successfully used to reduce the incidence of labor informality and achieve higher equality in a globalized economy. To this purpose, it develops a two-area model: a developed country and an emerging country. The two areas differ according to the size of the informal sector, which is characterized by a more flexible labor market and lower productivity. To illustrate the potential role of taxation in achieving a more fair income distribution, the paper introduces a trade shock to simulate the effects of trade liberalization. Trade expansion has often been blamed for leading to an expansion of the informal sector and a widening of wage income disparities. In this context, the paper analyzes whether a budget-neutral tax reform -- switching the tax burden from payroll taxes paid by firms operating in the formal sector to a consumption tax -- can mitigate possible adverse effects of trade liberalization and support labor formalization. The effects of taxation are seen in the context of the trade-offs between growth, labor formality and equity. The analysis suggests that small improvements in formalization, resulting from the tax reform, come at the cost of widening income inequality. To reduce the incidence of low-quality jobs, tax policy interventions should go hand in hand with more effective social protection systems and labor laws.

Keywords: International Trade and Trade Rules, Labor Markets, Public Finance Decentralization and Poverty Reduction, Macro-Fiscal Policy, Taxation & Subsidies, Economic Adjustment and Lending, Public Sector Economics, Employment and Unemployment, Rural Labor Markets

Suggested Citation

Langot, Francois and Merola, Rossana and Oh, Samil, Can Taxes Help Ensure a Fair Globalization? (August 12, 2019). World Bank Policy Research Working Paper No. 8975. Available at SSRN: https://ssrn.com/abstract=3436476

Francois Langot (Contact Author)

University of Angers - Centre d'Etudes Prospectives d'Economie Mathematique Appliquees a la Planification (CEPREMAP) ( email )

Ecole Normale Superieure
48 boulevard Jourdan
75014 Paris
France

Université du Maine - Groupe d' Analyse des Itineraires et Niveaux Salariaux (GAINS) ( email )

72085 Le Mans Cedex 9
France

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Rossana Merola

International Labour Organization (ILO) ( email )

Route des Morillons 4
Geneva, 1211
Switzerland

Samil Oh

The Bank of Korea ( email )

39, Namdaemun-ro, Jung-gu
Seoul, 04531
Korea, Republic of (South Korea)

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