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. (JEL D31, F34, H21, H23, H74, J61, R23)

Full Text
Published version (Free)

Talk to us

Join us for a 30 min session where you can share your feedback and ask us any queries you have

Schedule a call