Inequality, Taxation, and Sovereign Default Risk
American Economic Journal: Macroeconomics
vol. 16,
no. 2, April 2024
(pp. 217-49)
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 nonlinear 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 US state government spread.Citation
Deng, Minjie. 2024. "Inequality, Taxation, and Sovereign Default Risk." American Economic Journal: Macroeconomics, 16 (2): 217-49. DOI: 10.1257/mac.20210133Additional Materials
JEL Classification
- D31 Personal Income, Wealth, and Their Distributions
- F34 International Lending and Debt Problems
- H21 Taxation and Subsidies: Efficiency; Optimal Taxation
- H23 Taxation and Subsidies: Externalities; Redistributive Effects; Environmental Taxes and Subsidies
- H74 State and Local Borrowing
- J61 Geographic Labor Mobility; Immigrant Workers
- R23 Urban, Rural, Regional, Real Estate, and Transportation Economics: Regional Migration; Regional Labor Markets; Population; Neighborhood Characteristics
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