On the Distributional Effects of International Tariffs

48 Pages Posted: 8 Jul 2020

See all articles by Daniel Carroll

Daniel Carroll

Federal Reserve Banks - Federal Reserve Bank of Cleveland

Sewon Hur

Federal Reserve Bank of Dallas

Date Written: June 22, 2020

Abstract

What are the distributional consequences of tariffs? We build a trade model with incomplete asset markets and households that are heterogeneous in their income, wealth, and labor skill. We increase US tariffs by 5 percentage points and examine several budget-neutral fiscal policies for redistributing tariff revenue. Without redistribution, tariffs hurt all households, but higher tradables prices disproportionately harm the poor and the ensuing decline in the skill premium disproportionately harms the skilled. With redistribution, lowering the labor income tax leads to lower economic activity but higher average welfare relative to lowering the capital income tax; nevertheless, both policies reduce average welfare with retaliatory tariffs. Finally, when tariff revenue is rebated to households as lump-sum transfers, tariffs can be welfare improving even with full retaliation.

Keywords: tariffs, inequality, consumption, welfare, taxation

JEL Classification: E21, F10, F62, H21

Suggested Citation

Carroll, Daniel and Hur, Sewon, On the Distributional Effects of International Tariffs (June 22, 2020). FRB of Cleveland Working Paper No. 20-18, Available at SSRN: https://ssrn.com/abstract=3646322

Daniel Carroll (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Cleveland ( email )

East 6th & Superior
Cleveland, OH 44101-1387
United States

Sewon Hur

Federal Reserve Bank of Dallas ( email )

2200 North Pearl Street
PO Box 655906
Dallas, TX 75265-5906
United States

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