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.     

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.     

Optimal Tariffs under a Revenue Constraint*

This paper examines the optimal tariff structure under a revenue constraint. When a fixed level of tax revenue has to be collected from the tariff alone, no adjustment in tariff rates can achieve an efficient resource allocation, even in a small open economy. Hence, the optimal tariff problem arises under a revenue constraint. We show that the revenue‐constrained optimal tariff structure is characterized by the following two rules: (i) the optimal tariff rate is lower for the import good that is a closer substitute for the export good, and (ii) the stronger the cross‐substitutability between imports, the closer the optimal tariff is to uniformity. This provides a theoretical explanation for the finding in empirical studies that the efficiency loss from a uniform tariff structure is negligible.     

OPTIMUM-WELFARE AND MAXIMUM-REVENUE TARIFFS UNDER BERTRAND DUOPOLY

This article derives the maximum‐revenue tariff and the optimum‐welfare tariff under Bertrand duopoly with differentiated products. It is shown that both tariffs are lower under Bertrand duopoly than under Cournot duopoly. Also, the optimum‐welfare tariff may exceed the maximum‐revenue tariff under both Bertrand duopoly and Cournot duopoly. This result is more likely the lower the costs of the home firm relative to the costs of the foreign firm, and the greater the degree of product substitutability. Also, it is shown that the optimum‐welfare tariff is less likely to exceed the maximum‐revenue tariff under Bertrand duopoly than under Cournot duopoly.     

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.     

A Win–Win–Win Tariff–Tax Reform under Imperfect Competition

Taking into account non‐constant marginal costs, this paper considers the effects of a tariff cut combined with a consumption tax increase on welfare, government revenue, and market access. We show that welfare, government revenue, and market access can all improve with this policy reform under decreasing marginal costs. This result may provide a theoretical rationale for the above policy reform, which is guided by the International Monetary Fund and the World Bank.     

Public investment,taxation, and long-run output in economies with multi-level governments

This paper examines the dynamic effects of taxation and investment on the steady state output level of an economy. A simple neoclassical growth model with different tiers of government is developed. The initial focus is on governments that aim to maximise their citizens' welfare and economic performance by providing consumption goods for private consumption and public capital for private production. It is shown that a long-run per capita output maximising tax rate can be derived and that there also exists an optimal degree of fiscal decentralisation. The analysis then extends to the case where governments attempt instead to maximise their own tax revenue to fund expenditures which do not contribute to the utility of their citizens. Three different cases of taxation arrangement are considered: tax competition, tax sharing, and tax coordination. The modeling shows that intensifying tax competition will lead to an increase in the aggregate tax rate as compared to the cases of sharing and coordination amongst governments. These tax rates are both higher than the long-run per capita output maximising rate that was implied under the welfare maximising government scenario.     

Capital and Consumption Tax Reforms in a Small Open Economy

The effects of a reform in capital and consumption taxes on private welfare and government tax revenue are examined for a small open, capital‐importing economy. A trade‐off between private welfare and tax revenue is encountered in maximizing social welfare. Nonetheless, lowering capital taxes and raising consumption taxes can increase both private welfare and tax revenue if the initial tax rates are not optimal. In addition, a tax reform by this fashion is a likely response to a rise in the foreign rate of return on capital.     

PUBLIC INVESTMENT,TAX EVASION,AND THE WELFARE EFFECTS OF A TARIFF REFORM

Contrary to the case considered in literature, the experience of developing countries indicates that the tariff reforms have not been revenue neutral due to the heavy dependence of developing countries on trade taxes and pervasive tax evasion. In contrast to the plausibility of a welfare loss shown by the current literature, when the adverse effect of the loss of tariff revenue on public investment is factored in, the welfare outcome of the tariff reforms of past few decades turns out to be much more pessimistic. The constraints imposed by tariff dependence and tax evasion imply that future tariff reforms in these countries should be undertaken after strengthening their domestic tax system and augmenting the ability of their governments to fight tax evasion. For countries of sub‐Saharan Africa, where such reforms are likely to be concentrated, this would need planning and capacity building over a longer time horizon. (JEL D61, D62, F13, H26)     

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.     

Flat tax? Maybe not a bad idea after all

This work studies the actual degree of progressivity in the Italian tax and transfer system and examines possible reforms towards the optimum. It analyzes the distribution of personal income and effective tax rates across the Italian population, computing income and tax liabilities from survey data, and studies the optimal level of progressivity. To this end, it uses a model developed in Heathcote et al. (2017) with heterogeneous agents where skill investment and labor supply are endogenous and the government provides a public good under a balanced budget. All the main tradeoffs that shape optimal progressivity appear: the presence of inequality in initial conditions and imperfect private insurance push for positive progressivity, whereas labor supply and skill investment call for regressivity. The model suggests a drastic reduction in progressivity under both the baseline and the alternative specifications. In particular, it calls for substantial reductions in marginal tax rates above approximately 0.25 times the mean income along with increased tax rates at the lower end of the income distribution. These reforms may be approximated by a flat tax at 29% under the baseline and at 32.5% under the alternative specification, holding the required positive level of progressivity constant.     

Maximum‐revenue versus Optimum‐welfare Export Taxes: a Delegation Game*

In the Eaton and Grossman (1986 ) Bertrand duopoly model of strategic export taxes, both countries may be better off if they both delegate to policymakers who maximize tax revenue rather than welfare. However, both countries delegating to policymakers who maximize tax revenue is not a Nash equilibrium unless the degree of product substitutability is sufficiently high. For a wide range of values for the degree of product substitutability, the game is a prisoner's dilemma where both countries are better off delegating to policymakers who maximize tax revenue but both will delegate to policymakers who maximize welfare in the Nash equilibrium.     

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.     

Imperfect Capital Mobility and Local Government Behaviour in a Two‐Period Economy

One clear result in the tax competition literature is that, when head taxes on immobile residents are available, the optimal capital tax rate for local government is zero. However, zero tax rate, when resident taxes are available, is incompatible with the phenomenon actually observed. In most countries, local governments use capital taxes as policy variables for choosing a nonzero tax rate. This paper presents a model of a two‐period economy with imperfect mobile capital to explain the behaviour of local government providing capital subsidies on capital. It further examines an equilibrium tax rate where local government’s objectives include Niskanen‐type revenue‐maximizing.     

当前世界减税趋势与中国税收政策取向

进入新世纪 ,随着经济全球化的加快发展 ,各国纷纷推出了减税计划和方案 ,形成了新一轮世界性的减税趋势和浪潮。我国自 1 998年以来 ,税收收入连年大幅增长 ,这对增强国家宏观调控能力 ,促进经济形势的好转发挥了重要作用。但是 ,税收长期超常增长 ,加重了企业和居民的负担 ,对刺激投资和消费、扩大内需、提高企业国际竞争力不利。在当前国内外形势下 ,从有利于经济持续发展来看 ,中国应采取完善税制、适度减税政策。     

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.     

Tariff Reductions in the Presence of Foreign Direct Investment

This paper argues that the welfare effects of trade liberalization in the presence of foreign direct investment obtained under perfect competition cannot be extended to imperfectly competitive markets. In the Heckscher-Ohlin model, trade liberalization may be paradoxically immiserizing when the traditional welfare-increasing result is corrected for the change in foreign capital revenue. Under imperfect competition this cannot occur, except under rather implausible assumptions. Indeed, a tariff reduction is expected to increase welfare when the welfare indicator is corrected for the presence of foreign capital, regardless of the type of market structure and the form of competitive rivalry.     

COST‐SAVING PRODUCTION TECHNOLOGIES AND STRATEGIC DELEGATION*

This work analyses a managerial delegation model in which firms choose between two production technologies: a low marginal cost technology and a high marginal cost technology. For the former to be adopted more investment is needed than for the later. By giving managers of firms an incentive scheme based on a linear combination of profit and sales revenue, we find that Bertrand competition provides a stronger incentive to adopt the cost‐saving technology than the strict profit maximisation case. However, the results may be reversed under Cournot competition. If the degree of product substitutability is sufficiently low (high), the incentive to adopt the cost‐saving technology is larger under strict profit maximisation (strategic delegation).     

Optimal manipulation rules in a mixed oligopoly

We study the optimal manipulation rules of a public firm’s objective function in a mixed oligopoly with imperfect product substitutability. We start with a baseline duopoly model and compare the solutions under quantity and price competition, and the way they are affected by product substitutability. This allows us to show that partial privatization, strategic delegation and other specific government’s commitments on the objective function of the public management can be looked at as special cases of these optimal rules, and to evaluate the viability of these policies under the two modes of competition. In this framework, we also discuss the equivalence between manipulation of the objective function and Stackelberg leadership. Since optimal manipulation rules change as new dimensions are added, we also derive the optimal rules under oligopoly, quadratic costs, and competition of international firms. This fairly general unified framework allows to discuss the impact of these factors on the government’s implementation policies of the optimal manipulation rules.     

Fiscal federalism,jurisdictional competition,and the size of government

Fiscal federalism is commonly held to reduce the size of government, but how does it do so: through shrinking the welfare state, cutting government consumption, or reducing public investment? This paper examines tax competition under fiscal federalism through the lens of imperfect competition theory, derives new empirical implications from different theories of fiscal federalism, and tests those hypotheses with new variables and data. Cross-national statistical results show that jurisdictional competition under fiscal federalism is associated with reductions in the administrative expense of government but not the size of the welfare state. Moreover, the apparent impact of fiscal federalism with a high degree of jurisdictional competition is larger than that estimated in previous research. Once the models have been appropriately specified, the United States is no longer an outlier among high-income democracies on either government consumption or social spending. Close examination of the data reveals that some fiscally federal systems better approximate a “market-preserving model” and others a “capital-privileging” or “state-corroding” model.