Revenue‐enhancing Trade Liberalization in a Differentiated Duopoly

Existing studies suggest that in developing countries, tax reforms that increase consumption taxes can compensate for shortfalls in revenue from a tariff reduction. However, these revenue‐enhancing tariff–tax reforms have a critical shortcoming—they generally reduce welfare under imperfect competition. This paper shows that tax reforms such as consumption tax reforms do not necessarily have to be implemented to make up for revenue shortfalls from tariff reductions under imperfect competition, because trade liberalization through tariff cuts leads to an increase in government revenue when domestic and imported goods have a high substitutability. This revenue‐enhancing effect of a tariff reduction occurs for a wider degree of product substitutability when initial tariff and consumption tax rates are high. More importantly, we show that even if initial tariff and consumption tax rates are sufficiently low, a tariff reduction still increases government revenue for a low degree of product differentiation under Bertrand competition.     

Export Product Diversification and Public Revenue’s Dependence on Resource Revenue

ABSTRACT

This article tries to reconcile two major priorities for countries, notably resource-rich countries on the international development agenda: export product diversification with a view to helping them better integrate into the multilateral trading system and tax reforms with a view to reducing the dependence of total public revenue on resource revenue, and therefore developing a more sustainable stream of public revenue. The analysis therefore involves examining empirically the impact of export product diversification on countries’ overall public revenue dependence on resource revenue, this dependence being measured by the share of resource revenue in total public revenue. The empirical analysis shows that export product diversification exerts a negative and significant impact on resource revenue share of total public revenue, and therefore could help facilitate tax reforms towards lower resource revenue dependence. Hence, while tax policy is the main policy tool to conduct tax reforms, export product diversification would likely contribute to facilitating the implementation of these reforms.     

A Political‐Economic Account of Global Tariffs

The objective of this paper is to evaluate the relative importance of three distinct factors that motivate redistributive government policy: tariff revenues, consumer welfare, and producer profits. We generalize Grossman and Helpman's (1994, American Economic Review 84: 833–850). protection‐for‐sale model by positing that government places different weights on these components of the welfare of its polity when it decides which industries to protect and to what extent. Employing tariff data from 40 countries, the predictions from this model are used to estimate these weights. The results are surprising in their range and variety. Developing countries with weak tax systems often weigh tariff revenue heavily, while more developed countries weigh producer interests the most. Very few hold consumer welfare dear.     

Border tax adjustments and tariff‐tax reforms with consumption pollution

We develop a model of a small open economy, where pollution per unit of consumption between domestically produced and imported quantities of the same good differs. We show that the first‐best policy combination calls for consumption taxes on all polluting goods, and border tax adjustment (BTA) measures, that is, tariffs or import subsidies. We identify conditions under which well‐known tariff‐tax reform policies for developing economies, such as a consumer‐price‐neutral piecemeal reform of trade and a consumption tax, and a consumer‐price‐neutral reform of all trade and consumption taxes improve welfare. We also evaluate whether reforms of trade taxes alone are superior to consumer‐price‐neutral reforms of trade and consumption taxes.     

Environmental Funds,Public Abatement,and Welfare

This paper addresses some features of environmental funds that the government uses to finance public abatement with pollution tax revenue or tariff revenue. I find that when the pollution tax rate and the tariff rate are jointly chosen optimally, then the optimal pollution tax rate is higher than the Pigouvian tax rate under public abatement financed by tariff revenue, and lower when public abatement is financed by pollution tax revenue. Furthermore, I show that the optimal tariff rate is positive regardless of which tax revenue is used to finance public abatement. These results are relevant for countries where the government seeks revenues earmarked for the financing of environmental funds.     

GENDER AND PUBLIC ATTITUDES TOWARD CORRUPTION AND TAX EVASION

The topics of corruption and tax evasion have attracted significant attention in the literature in recent years. We build on that literature by investigating empirically: (1) whether attitudes toward corruption and tax evasion vary systematically with gender and (2) whether gender differences decline as men and women face similar opportunities for illicit behavior. We use data on eight Western European countries from the World Values Survey and the European Values Survey. The results reveal significantly greater aversion to corruption and tax evasion among women. This holds across countries and time, and across numerous empirical specifications. (JEL H260, D730, J160, Z130)     

Tariffs,R&D,and two merger policies

We compare welfare-increasing and consumer-surplus-increasing merger policies in an oligopoly when merging firms face endogenous trade policies, and engage in cost-reducing R&D activity. As R&D becomes less efficient, the equilibrium market structures (EMS) become less concentrated under both merger policies. When R&D is very efficient, monopoly becomes the EMS under the welfare-increasing merger policy. This occurs as the absence of tariff and efficient R&D under monopoly limit the price increase and the gain in profits outweighs the loss in consumer surplus and tariff revenue. The results suggest that trade policies should take into account merger policies and industries' R&D efficiency. The results also show that global welfare maximization requires global merger policy coordination.     

Welfare‐ and Revenue‐Enhancing Tariff and Tax Reform under Imperfect Competition

We examine welfare and revenue effects of tariff and tax reform in a country importing final and intermediate goods, both of which are produced under imperfect competition. We consider two reform strategies. First, lower the sum of a consumption tax and a tariff on the intermediate good, and leave the sum of the consumption tax and a tariff on the final good unchanged. Second, lower the former and change the latter to leave government revenue unchanged. We specify conditions under which each reform strategy raises welfare without decreasing government revenue.     

Growth,revenue, and welfare effects of tariff and tax reform: Win–win–win strategies

We examine growth, revenue, and welfare effects of tariff and tax reform with a two-good, two-factor endogenous growth model. Learning-by-doing and intersectoral knowledge spillovers contribute to endogenous growth consistent with incomplete specialization. We obtain two main results. First, trade liberalization raises (or lowers) the growth rate if and only if the import sector is more effective-labor-intensive (or capital-intensive). Second, we can attain growth, revenue, and welfare gains by combining consumer–price–neutral tariff and tax reform for growth enhancement with an additional rise in the consumption tax on the less distorted good.     

Coordinating Tariff Reduction and Domestic Tax Reform under Imperfect Competition*

A major constraint on trade liberalization in many countries is the prospective loss of government revenue. Recent results, however, have established a simple and appealing strategy for overcoming this difficulty, whilst still realizing the efficiency gains from liberalization, in small, competitive economies: combining tariff cuts with point‐for‐point increases in destination‐based consumption taxes unambiguously increases both national welfare and total government revenue. This note explores the implications of imperfect competition for this strategy. Examples are easily found in which this strategy unambiguously reduces domestic welfare.     

Tax Evasion,Corruption and Tax Loopholes

This paper addresses tax loopholes that allow firms to exploit borderline cases between legal tax avoidance and illegal tax evasion. In general, tax loopholes are detrimental to a revenue‐maximizing government. This may change in the presence of corruption in the tax administration. Tax loopholes may serve as a separating mechanism that helps governments maximize revenues and curb corruption, which may explain why developing countries only gradually close loopholes in their tax codes.     

TAX-PRICE REFORM WITH DIRECTLY UNPRODUCTIVE PROFIT-SEEKING (DUP) ACTIVITIES*

This paper explores the extent to which insights available from existing writings on directly unproductive profit-seeking (DUP) activities in international trade modify rules of tax and tariff reform in normative public economics and examines in what way these should affect advice on tax policy usually given to developing countries. The analysis proceeds by developing two models. The first incorporates revenue seeking directly into a standard open economy public finance model and examines whether analysis of policy reform and economic costs of distortionary tariffs must be modified. The second includes a political component in the form of lobbying for subsidies – the expenditure side of the budget – as well as a normative economic component that raises taxes – the revenue side – to finance the social costs of such lobbying. The model can be used to determine the effects of politically determined expenditures on tax setting. The analysis shows that the grammar of welfare-theoretic arguments that underlies the reform and design of tax and tariff structures is robust to the inclusion of DUP activities of the type considered here. In particular, the latter lend no presumption in favor of uniformity in tax and tariff structures. It is argued that existing policy advice on tax and tariff reform derived from models where DUP activities have traditionally played no role continues to be appropriate when account is taken of formal treatments of DUP-type phenomena extant in the current literature.     

FISCAL CONSTRAINTS, COLLECTION COSTS, AND TRADE POLICIES

The last two decades witnessed trade liberalization in many developing countries. What caused this trend, and why have trade barriers been so ubiquitous when economic theory overwhelmingly supports free trade? This paper proposes that governments' revenue needs are the driving force. Governments may rely disproportionately on trade taxes because they are inexpensive to collect. Trade liberalization is an integral part of a tax reform: a tax base expansion is necessary to allow governments to reduce tariff rates. This hypothesis is supported by a panel data analysis of 27 developing countries.     

Trade Liberalization in the Presence of Foreign Direct Investment and Tax Credits: Estimates for Costa Rica

The paper uses a calibrated general-equilibrium model to quantify the welfare impact of trade liberalization—and compute the optimal tariff structure—for Costa Rica when trade-policy-induced foreign direct investment and international capital taxation with credits are present. It shows that complete trade liberalization reduces Costa Rica's welfare, as it leads to an outflow of capital and loss of tax revenue which more than offset the efficiency gains from an enhanced resource allocation. The optimal tariff structure for the Costa Rican economy turns out to be a mixture of relatively small import tariffs and subsidies.     

Pre-commitment Mechanism and Policy Credibility in African Trade Reform

In the absence of a binding pre-commitment mechanism, a government has an incentive to renege on announced policy. This is a well-established result in the literature. The paper applies this theory to tariff policy by developing a two-game model to analyze the credibility of government tariff reform announcements. The pre-commitment solution is subgame-imperfect; therefore, government's announcement of tariff reforms is time-inconsistent. Using a sample of African countries operating under IMF structural adjustment programs, the study finds only weak evidence that countries implemented their announced tariff reforms. However, SAP agreements seem to enhance private sector confidence in government reforms.     

Why Do Poor democracies Collect a Lot of Tariff Revenue?

Governments in developing countries typically collect a significantly higher proportion of their revenue in the form of trade taxes, than their developed country counterparts. This paper provides a political–economic explanation for this phenomenon. A model of trade in vertically differentiated products is used in order to determine the preferences of the households among different ways of raising government revenue. It is shown that the majority of households in poor countries will consume low-quality, domestically produced varieties of differentiated products and would thus register a preference for the government to rely more on tariff rather than income tax revenue in order to finance its operations.     

Revenue-increasing and welfare-enhancing reform of taxes on exports

The loss of revenue from a reduction in export taxes has been a concern for trade policy reform in many developing countries. We discuss a strategy for selective reform of taxes on exports that enhances welfare and increases revenue. The strategy involves a reduction in the export tax on a given commodity with an offsetting increase in production tax to keep the producer price unchanged. This strategy is especially promising for exportables with a net subsidy on domestic consumption due to high export taxes and low consumption taxes.     

Piecemeal Reform of Domestic Indirect Taxes toward Uniformity in the Presence of Pollution: with and without a Revenue Constraint

The literature on indirect tax reforms in pollution‐ridden economies is quite limited. This paper, using a general equilibrium model of a perfectly competitive small open economy with both production‐ and consumption‐generated pollution, considers the welfare implications of tax reforms that take the structure of consumption and production taxes toward uniformity. Specifically, both in the presence and absence of a binding government revenue constraint, we derive sufficient conditions for welfare improvement in the case where we implement (i) reforms in either production or consumption taxes, and (ii) reforms in both consumption and production taxes.     

Welfare‐improving Coordinated Tariff and Sales Tax Reforms under Imperfect Competition

This paper studies the welfare effects of coordinated domestic sales tax reform associated with a reduction of the import tariff under imperfect competition. We set up a simple oligopoly trading model where domestic and exporting firms compete in the home market. We show that, if the initial levels of import tariff and sales tax are positive, there always exist welfare‐improving sales tax reforms. In some cases, a reduction of the sales tax accompanied by a reduction of the import tariff increases social welfare, whereas in other cases, raising the sales tax can increase social welfare.     

Regional versus Multilateral Trade Liberalization,Environmental Taxation,and Welfare

The paper considers trade between identical countries with imperfectly competitive markets, and compares the impacts of regional and multilateral tariff reduction on strategic environmental taxation and welfare. While both forms of trade liberalization increase production and consumption in tariff‐reducing countries, regionalism also reduces production in a non‐participating country and may decrease its consumption. Consequently, regionalism and multilateralism change pollution tax and welfare in the tariff‐reducing countries in similar ways when pollution is local, but in dissimilar ways for global pollution. When pollution is global, regionalism is likely to be preferred to multilateralism for the establishment of free trade among countries.