Globalization, Income Tax and the Redistribution–Progressivity Tradeoff

We present a simple model in which (1) households select their country of residence depending on income taxation and on the cost of migrating and living abroad, and (2) globalization comes with a continuous cut in this cost. Globalization modifies the income tax and redistribution schemes which display three successive stages. In the first stage, the redistribution goal is compatible with tax progressivity. In the second, the redistribution goal makes taxation to become regressive at the top. Third, if the migration cost continues to decline, the government can no longer achieve its redistribution goal and the tax structure becomes volatile. Globalization reduces both redistribution and progressivity, and it generates and magnifies a tradeoff between redistribution and tax progressivity. Making redistribution and progressivity contradictory, the model provides a new explanation for the concomitance of growing redistribution expenditure and growing inequality, and to the social democracy curse experienced by a number of advanced countries in the last three decades.