IDEAS home Printed from https://ideas.repec.org/p/fip/feddwp/9336.html
   My bibliography  Save this paper

Income taxes as reciprocal tariffs

Author

Listed:
  • W. Michael Cox
  • David M. Gould
  • Roy J. Ruffin

Abstract

This article shows the equivalence between tariffs on international trade and income taxation. Traditionally, income taxes have been seen as lowering society's output through the household's labor-leisure trade-off. Income taxes also reduce the degree to which individuals specialize in market activity, which is similar to the way countries respond to tariffs in international trade. Income taxes discourage individuals from specializing in activities that reflect their comparative advantage. In so doing, income taxes may have their most distorting effects, not by encouraging individuals to work less but by causing them to spend more time working at endeavors for which their talent is limited. Using a general model of interpersonal exchange, the authors demonstrate parallels between income taxes and tariffs. Over a range of income taxes, raising taxes can benefit large groups of similarly skilled individuals and hurt small groups. As in tariff theory, the costs of income taxes are small only if they succeed in raising revenue. Thus, it is very costly for an economy to be on the downward portion of its tax revenue (Laffer) curve. The more heterogeneous the society, the higher the income tax rate that will maximize tax revenues. By overlooking the effects of heterogeneity in the workforce and the potential for workers to flee to home production, policymakers may under- or overestimate the effects of income taxes on various sectors of the economy and tax with unintended consequences.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • W. Michael Cox & David M. Gould & Roy J. Ruffin, 1993. "Income taxes as reciprocal tariffs," Working Papers 9336, Federal Reserve Bank of Dallas.
    • Handle: RePEc:fip:feddwp:9336
    as

    Download full text from publisher

    File URL: https://www.dallasfed.org/~/media/documents/research/papers/1993/wp9336.pdf
    File Function: Full text
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Juster, F Thomas & Stafford, Frank P, 1991. "The Allocation of Time: Empirical Findings, Behavioral Models, and Problems of Measurement," Journal of Economic Literature, American Economic Association, vol. 29(2), pages 471-522, June.
    2. McGrattan, Ellen R & Rogerson, Richard & Wright, Randall, 1997. "An Equilibrium Model of the Business Cycle with Household Production and Fiscal Policy," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 38(2), pages 267-290, May.
    3. Boskin, Michael J., 1975. "Efficiency aspects of the differential tax treatment of market and household economic activity," Journal of Public Economics, Elsevier, vol. 4(1), pages 1-25, February.
    4. Sandmo, Agnar, 1990. "Tax Distortions and Household Production," Oxford Economic Papers, Oxford University Press, vol. 42(1), pages 78-90, January.
    5. Roy Ruffin, 1979. "Border tax adjustments and countervailing duties," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 115(2), pages 351-355, June.
    6. Eisner, Robert, 1989. "The Total Incomes System of Accounts," University of Chicago Press Economics Books, University of Chicago Press, edition 1, number 9780226196381.
    7. Peter M. Mieszkowski, 1967. "On the Theory of Tax Incidence," Journal of Political Economy, University of Chicago Press, vol. 75(3), pages 250-250.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Davis, Steven J. & Henrekson, Magnus, 2004. "Tax Effects on Work Activity, Industry Mix and Shadow Economy Size: Evidence from Rich-Country Comparisons," Ratio Working Papers 57, The Ratio Institute.
    2. Strand, Jon, 2005. "Tax distortions, household production, and black-market work," European Journal of Political Economy, Elsevier, vol. 21(4), pages 851-871, December.
    3. Zhang, Jie & Davies, James & Zeng, Jinli & McDonald, Stuart, 2008. "Optimal taxation in a growth model with public consumption and home production," Journal of Public Economics, Elsevier, vol. 92(3-4), pages 885-896, April.
    4. Huffman, Wallace, 2004. "Marketizing U.S. Production in the Post-War Era: Implications for Estimating CPI Bias and Real Income from a Complete-Household-Demand System," Staff General Research Papers Archive 11987, Iowa State University, Department of Economics.
    5. Yongsung Chang & Andreas Hornstein, 2006. "Home production," Working Paper 06-04, Federal Reserve Bank of Richmond.
    6. Rupert, Peter & Rogerson, Richard & Wright, Randall, 2000. "Homework in labor economics: Household production and intertemporal substitution," Journal of Monetary Economics, Elsevier, vol. 46(3), pages 557-579, December.
    7. Blankenau, William & Kose, M. Ayhan, 2007. "How Different Is The Cyclical Behavior Of Home Production Across Countries?," Macroeconomic Dynamics, Cambridge University Press, vol. 11(1), pages 56-78, February.
    8. van Soest, A.H.O. & Stancanelli, E.G.F., 2010. "Does Income Taxation Affect Partners’ Household Chores?," Discussion Paper 2010-76, Tilburg University, Center for Economic Research.
    9. Urban J. Jermann & Marianne Baxter, 1999. "Household Production and the Excess Sensitivity of Consumption to Current Income," American Economic Review, American Economic Association, vol. 89(4), pages 902-920, September.
    10. Michele BOLDRIN & Mariacristina DE NARDI & Larry E. JONES, 2015. "Fertility and Social Security," JODE - Journal of Demographic Economics, Cambridge University Press, vol. 81(3), pages 261-299, September.
    11. L. Rachel Ngai & Christopher A. Pissarides, 2008. "Trends in Hours and Economic Growth," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(2), pages 239-256, April.
    12. Homburg, Stefan, 2010. "Allgemeine Steuerlehre: Kapitel 1. Grundbegriffe der Steuerlehre," EconStor Books, ZBW - Leibniz Information Centre for Economics, number 92547.
    13. Kelly Ragan, 2007. "Taxes, Transfers and Time Use: Fiscal Policy in a Model of Household Production," 2007 Meeting Papers 681, Society for Economic Dynamics.
    14. Chang, Yongsung & Schorfheide, Frank, 2003. "Labor-supply shifts and economic fluctuations," Journal of Monetary Economics, Elsevier, vol. 50(8), pages 1751-1768, November.
    15. Koehne, Sebastian & Sachs, Dominik, 2022. "Pareto-improving reforms of tax deductions," European Economic Review, Elsevier, vol. 148(C).
    16. Patricia Apps & Ray Rees, 2018. "Optimal family taxation and income inequality," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 25(5), pages 1093-1128, October.
    17. Apps, Patricia & Rees, Ray, 1999. "On the taxation of trade within and between households," Journal of Public Economics, Elsevier, vol. 73(2), pages 241-263, August.
    18. Milton H. Marquis, 2001. "Inflation taxes, financial intermediation, and home production," Working Paper Series 2001-04, Federal Reserve Bank of San Francisco.
    19. Bridgman, Benjamin, 2016. "Home productivity," Journal of Economic Dynamics and Control, Elsevier, vol. 71(C), pages 60-76.
    20. Piggott, John & Whalley, John, 1996. "The Tax Unit and Household Production," Journal of Political Economy, University of Chicago Press, vol. 104(2), pages 398-418, April.

    More about this item

    Keywords

    Tariff; Taxation;

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fip:feddwp:9336. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Amy Chapman (email available below). General contact details of provider: https://edirc.repec.org/data/frbdaus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.