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Revenue-enhancing Trade Liberalization in Developing Countries

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  • Arijit Mukherjee

    ()
    (University of Nottingham, UK and GEP, UK)

  • M. Emranul Haque

    ()
    (University of Manchester, UK)

Abstract

Recovering revenue loss due to the reduction in import tariffs is a major concern of many developing economies. In an economy with free entry, which affects the product market competition, we show that, even if there is no other tax reform such as a profit tax reform, the market mechanism itself takes care of the loss of government revenue following a tariff reduction if entry is sufficiently costly. A compensatory profit tax to compensate the loss of government revenue following a tariff reduction is required for an intermediate level of entry cost. If the entry cost is very small, the loss of government revenue following a tariff reduction cannot be compensated even with a profit tax reform. Hence, the net effect of a tariff reduction on government revenue therefore depends on how much tariff and tax revenues are created by entry, which is affected by changes in both the tariff rate and the profit tax rate.

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Bibliographic Info

Article provided by AccessEcon in its journal Economics Bulletin.

Volume (Year): 29 (2009)
Issue (Month): 3 ()
Pages: 2275-2281

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Handle: RePEc:ebl:ecbull:eb-09-00467

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Related research

Keywords: Free Entry; Entry Cost; Trade Liberalization;

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  1. Lopez, Ramon & Panagariya, Arvind, 1992. "On the Theory of Piecemeal Tariff Reform: The Case of Pure Imported Intermediate Inputs," American Economic Review, American Economic Association, vol. 82(3), pages 615-25, June.
  2. Emran, M. Shahe & Stiglitz, Joseph E., 2005. "On selective indirect tax reform in developing countries," Journal of Public Economics, Elsevier, vol. 89(4), pages 599-623, April.
  3. Panagariya, Arvind, 1992. "Input tariffs, duty drawbacks, and tariff reforms," Journal of International Economics, Elsevier, vol. 32(1-2), pages 131-147, February.
  4. Hatzipanayotou, Panos & Michael, Michael S. & Miller, Stephen M., 1994. "Win-win indirect tax reform : A modest proposal," Economics Letters, Elsevier, vol. 44(1-2), pages 147-151.
  5. Mujumdar, Sudesh, 2004. "Revenue implications of trade liberalization under imperfect competition," Economics Letters, Elsevier, vol. 82(1), pages 83-89, January.
  6. Michael Keen & Johanna Elisabeth Ligthart, 1999. "Coordinating Tariff Reduction and Domestic Tax Reform," IMF Working Papers 99/93, International Monetary Fund.
  7. Haque, M. Emranul & Mukherjee, Arijit, 2005. "On the revenue implications of trade liberalization under imperfect competition," Economics Letters, Elsevier, vol. 88(1), pages 27-31, July.
  8. Michael, Michael S. & Hatzipanayotou, Panos & Miller, Stephen M., 1993. "Integrated reforms of tariffs and consumption taxes," Journal of Public Economics, Elsevier, vol. 52(3), pages 417-428, October.
  9. Emran, M. Shahe, 2005. "Revenue-increasing and welfare-enhancing reform of taxes on exports," Journal of Development Economics, Elsevier, vol. 77(1), pages 277-292, June.
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