Progressive income tax and comparative advantage in trade

Abstract

This study examines how a nation’s progressive personal income tax system impacts its comparative advantage in industries characterized by a large share of high-income occupations. While prior research has explored the economic consequences of income tax policies, little is known about their specific implications for a country’s competitive edge in international trade. We employ comprehensive world trade data to investigate the relationship between income tax progressiveness and industry competitiveness. Our analysis reveals that countries with more progressive income tax systems tend to exhibit comparative disadvantages in industries prominently featuring high-income occupations, including high-tech and professional services. This phenomenon can be attributed to a key mechanism: progressive income tax policies alter occupational choices by discouraging high-income pursuits, ultimately eroding the competitiveness of industries that heavily rely on these occupations. This research underscores the importance of policymakers considering the unintended consequences of income tax progressiveness on industry competitiveness in the global market.