# Tariff Reduction and Income Inequality: Some Empirical Evidence

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## Abstract

This paper explores the relationship between tariff reductions and income inequality for 37 countries over the period 1984 to 2010, a period of extensive trade liberalization. Using panel data techniques we find that a permanent reduction in the tariff rate will significantly increase short-run income inequality. To obtain further insight into how the distribution of income is affected, we also estimate the impact of tariffs on income shares by quintiles. We find that the relative income of the lowest quintile is the most adversely affected, while the greatest beneficiaries are the agents in the second richest quintile. By adopting a panel data approach, and including a wide range of control variables, we are confident that these findings reflect causal effects rather than merely reflecting spurious correlations. We also find that reducing tariffs will likely increase long-run income inequality, although these results are less conclusive. The empirical evidence provides some support for the proposition that the speed with which, and the initial level from which, the tariff is adjusted affects income inequality. Finally, our empirical analysis confirms the conventional result that tariff reductions have an expansionary effect on aggregate output. This suggests that tariff reduction involves at least a short-run tradeoff between increasing the level of economic activity coupled with more income inequality.

## Keywords

Tariff reduction Income inequality Empirical evidence## JEL Classifications

C23 D31 F13 F41## Notes

### Acknowledgements

Rojas-Vallejos’s research was supported in part by the BecasChile Scholarship Program of the Chilean Government and the Grover and Creta Ensley Fellowship of the University of Washington. Turnovsky’s research was supported in part by the Van Voorhis endowment at the University of Washington. We thank Chris Papageorgiou for his constructive suggestions. Also, comments received at the 2014 Conference of the Association of Public Economic Theory, the 2014 Annual Conference of the Chilean Economic Association, the 4th International Economic Conference of the Turkish Economic Association and the 2015 Society for Computational Economics conference are gratefully acknowledged.

## Supplementary material

## References

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