Differential Tariffs and Income Inequality in the United States: Some Evidence from the States

Abstract

This paper explores the macroeconomic and distributional consequences of consumption tariffs and materials tariffs. It highlights the contrasting effects of consumption and raw materials tariffs on the dynamics of key measures of aggregate economic activity and inequality. We perform empirical estimation of these effects using a panel of annual data that spans the U.S. states over the period 1980–2015. We find that consumption tariff increases lead to statistically significant reductions in income inequality, while having contractionary effects on domestic output in the short term. Materials tariff increases also have a negative impact on economic activity while increasing income inequality. Our empirical results are robust to different model specifications and measures of income inequality, consistent with the predictions of the underlying theoretical model. This work shows the importance of disaggregating tariffs when studying the distributional effects of trade policy.