| Abstract: | 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. |
