Can Taxes Help Ensure a Fair Globalization?
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 count...
| Main Authors: | , , |
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| Format: | Working Paper |
| Language: | English |
| Published: |
World Bank, Washington, DC
2019
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/365031565623998467/Can-Taxes-Help-Ensure-a-Fair-Globalization http://hdl.handle.net/10986/32268 |
| Summary: | 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. |
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