Trade taxes are better?!?
Abstract
This paper examines the welfare implications of trade reforms with a government budget constraint. A general equilibrium approach is employed to analyze the welfare implications of a revenue-neutral trade reform by expanding the study of Anderson (1999). Unlike the applications in standard trade theory, the tariff revenue cuts due to the tariff reform must be compensated with increases in indirect taxes and not simply by assuming lump sum transfers. The concept of "Marginal Cost of Funds" (MCF) from the public finance literature is utilized to discover whether the prospective change is welfare improving or not. The paper generates MCF figures for 34 countries. The results suggest that there are significant welfare gains to be exploited through further trade liberalization, especially for the developing countries. Replacing trade taxes with indirect domestic taxes is beneficial for the majority (27 out of 34) of the countries in the sample. The results are of special interest to developing countries, which rely on trade taxes as a significant source of their government revenue, as well as for organizations such as the WTO, World Bank or the IMF.
Recommended Citation
Can Erbil,
"Trade taxes are better?!?"
(January 1, 2002).
Boston College Dissertations and Theses.
Paper AAI3048301.
http://escholarship.bc.edu/dissertations/AAI3048301
View More
