Time: June 24 (Fri.), 10:00 - 11:30 am (Beijing Time)

Title:  Inequality, Taxation, and Sovereign Default Risk

Registration link:

About the Speaker:

Minjie Deng is an assistant professor at Simon Fraser University. She obtained her Ph.D. in Economics from University of Rochester in 2020. Her research interests include debt sustainability, sovereign default, firm dynamics, fiscal policy, monetary policy, and other topics in international finance and macroeconomics. Minjie Deng published papers at Journal of Monetary Economics, European Economic Review, and R&R at American Economic Journal: Macroeconomics. She is an anonymous reviewer for American Economic Journal: Macroeconomics, European Economic Review, Journal of International Economics, and Review of Economic Studies.

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 the government’s ability to repay debt. I develop a sovereign default model with endogenous non-linear 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. With the estimated model, I find that income inequality accounts for one-fifth of the average U.S. state government spread.