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Revenue-neutral or profit-neutral tariff and tax reforms under imperfect competition: Welfare implications

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  • Chang, Yang-Ming
  • Sargsyan, Ruben

Abstract

Concerns over the financial losses of government in revenues resulting from tariff reductions under trade liberalization have triggered many low-income countries to opt for a proper strategy of reforming their domestic consumption taxes. This paper analyzes the welfare effects of two coordinated tariff and tax reform strategies: one is to keep government revenue unaffected, and the other is to leave domestic profit unchanged when there are tariff cuts. Within a stylized framework of international duopoly, we identify conditions under which the tariff and tax reforms (revenue-neutral and profit-neutral) make domestic consumers better off and are welfare improving to a reforming country.

Suggested Citation

  • Chang, Yang-Ming & Sargsyan, Ruben, 2022. "Revenue-neutral or profit-neutral tariff and tax reforms under imperfect competition: Welfare implications," International Review of Economics & Finance, Elsevier, vol. 80(C), pages 1-11.
    • Handle: RePEc:eee:reveco:v:80:y:2022:i:c:p:1-11
    DOI: 10.1016/j.iref.2022.02.029
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    More about this item

    Keywords

    Tariff cuts; Domestic tax reforms; Revenue neutrality; Profit neutrality; Welfare effects;
    All these keywords.

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations

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