How taxes and real wage inflexibility interact to make trade deficits addictive: The tertiary and quaternary burdens of a transfer

Abstract

© 2016 World Scientific Publishing Company.Previous papers on the transfer problem pay scant attention to the problems caused by the distortionary taxation that extracts the gift from the donor nation or the cut in distortionary taxation that bestows the gift to the recipient nation. When combined with inflexibility in the real wage these changes in taxation and the transfer itself impose a considerable burden to the donor matched by a considerable blessing to the recipient. We explore these effects, and conclude that "The Great Rebalancing" between the US and China needed to cure the US trade deficit, i.e., to eliminate the transfer that China is making to the US may bestow a big burden on the US matched by a big blessing for China.