Inequality, Taxation, and Sovereign Default Risk

61 Pages Posted: 24 Mar 2020 Last revised: 8 Aug 2023

See all articles by Minjie Deng

Minjie Deng

Simon Fraser University, Department of Economics

Date Written: September 1, 2019

Abstract

Income inequality and worker migration significantly affect sovereign default risk. Governments often impose progressive taxes to reduce inequality, which redistribute income but discourage labor supply and induce emigration. Reduced labor supply and a smaller high-income workforce erode the current and future tax base, reducing government's ability to repay debt. I develop a sovereign default model with endogenous non-linear taxation and heterogeneous labor to quantify this effect. In the model, the government chooses the optimal combination of taxation and debt, considering its impact on workers' labor and migration decisions. Income inequality accounts for one-fifth of the average U.S. state government spread.

Keywords: Sovereign default risk, Income inequality, Migration, Tax progressivity

JEL Classification: F34, F41, E62, H74

Suggested Citation

Deng, Minjie, Inequality, Taxation, and Sovereign Default Risk (September 1, 2019). Available at SSRN: https://ssrn.com/abstract=3545501 or http://dx.doi.org/10.2139/ssrn.3545501

Minjie Deng (Contact Author)

Simon Fraser University, Department of Economics ( email )

8888 University Drive
Burnaby, British Columbia V5A 1S6
Canada

HOME PAGE: http://www.minjiedeng.me/

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