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The Costs of Restrictive Trade Policies in the Presence of Factor Tax Distortions

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Author Info
Ian Parry ()

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Abstract

This paper uses a numerical general equilibrium model to examine the quantitative importance of pre-existing factor tax distortions for the welfare effects of tariffs and import quotas. The presence of pre-existing taxes can greatly raise the costs of these policies, possibly by over several hundred percent. For a tariff much of this extra cost can be offset if tariff revenues are used to reduce distortionary taxes. Hence there can be a large cost discrepancy between tariffs and quotas. The optimal tariff for a country with market power in trade can be reduced to zero, unless revenues finance cuts in distortionary taxes. Copyright Kluwer Academic Publishers 2001

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Publisher Info
Article provided by Springer in its journal International Tax and Public Finance.

Volume (Year): 8 (2001)
Issue (Month): 2 (March)
Pages: 147-170
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Handle: RePEc:kap:itaxpf:v:8:y:2001:i:2:p:147-170

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Related research
Keywords: pre-existing tax distortions; tariffs; import quotas; welfare costs;

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Baldwin, Robert E, 1992. "Are Economists' Traditional Trade Policy Views Still Valid?," Journal of Economic Literature, American Economic Association, vol. 30(2), pages 804-29, June. [Downloadable!] (restricted)
  2. Parry, Ian, 1998. "The Costs of Restrictive Trade Policies in the Presence of Factor Tax Distortions," Discussion Papers dp-98-37, Resources For the Future. [Downloadable!]
    Other versions:
  3. Williams III, Roberton C., 1999. "Revisiting the cost of protectionism:: The role of tax distortions in the labor market," Journal of International Economics, Elsevier, vol. 47(2), pages 429-447, April. [Downloadable!] (restricted)
  4. Ballard, Charles L & Shoven, John B & Whalley, John, 1985. "General Equilibrium Computations of the Marginal Welfare Costs of Taxes in the United States," American Economic Review, American Economic Association, vol. 75(1), pages 128-38, March. [Downloadable!] (restricted)
  5. Robin Boadway & Shlomo Maital & Martin Prachowny, 1973. "Optimal Tariffs, Optimal Taxes and Public Goods," Working Papers 120, Queen's University, Department of Economics.
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  6. Parry, Ian & Oates, Wallace, 1998. "Policy Analysis in a Second-Best World," Discussion Papers dp-98-48, Resources For the Future. [Downloadable!]
  7. Dixit, Avinash, 1985. "Tax policy in open economies," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 1, chapter 6, pages 313-374 Elsevier. [Downloadable!] (restricted)
  8. Browning, Edgar K, 1987. "On the Marginal Welfare Cost of Taxation," American Economic Review, American Economic Association, vol. 77(1), pages 11-23, March. [Downloadable!] (restricted)
  9. Deaton, Angus, 1981. "Optimal Taxes and the Structure of Preferences," Econometrica, Econometric Society, vol. 49(5), pages 1245-60, September. [Downloadable!] (restricted)
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  10. Lawrence Goulder, 1995. "Environmental taxation and the double dividend: A reader's guide," International Tax and Public Finance, Springer, vol. 2(2), pages 157-183, August. [Downloadable!] (restricted)
  11. Siebert, Horst, 1997. "Labor Market Rigidities: At the Root of Unemployment in Europe," Journal of Economic Perspectives, American Economic Association, vol. 11(3), pages 37-54, Summer. [Downloadable!] (restricted)
  12. Parry, Ian & Goulder, Lawrence & Williams III, Roberton, 1997. "When Can Carbon Abatement Policies Increase Welfare? The Fundamental Role of Distorted Factor Markets," Discussion Papers dp-97-18-rev, Resources For the Future. [Downloadable!]
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  13. Bhagwati, Jagdish N, 1982. "Directly Unproductive, Profit-seeking (DUP) Activities," Journal of Political Economy, University of Chicago Press, vol. 90(5), pages 988-1002, October. [Downloadable!] (restricted)
  14. Feenstra, Robert C, 1992. "How Costly Is Protectionism?," Journal of Economic Perspectives, American Economic Association, vol. 6(3), pages 159-78, Summer. [Downloadable!] (restricted)
  15. Krueger, Anne O, 1974. "The Political Economy of the Rent-Seeking Society," American Economic Review, American Economic Association, vol. 64(3), pages 291-303, June. [Downloadable!] (restricted)
  16. Mendoza, Enrique G. & Razin, Assaf & Tesar, Linda L., 1994. "Effective tax rates in macroeconomics: Cross-country estimates of tax rates on factor incomes and consumption," Journal of Monetary Economics, Elsevier, vol. 34(3), pages 297-323, December. [Downloadable!] (restricted)
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  17. Lucas, Robert E, Jr, 1990. "Supply-Side Economics: An Analytical Review," Oxford Economic Papers, Oxford University Press, vol. 42(2), pages 293-316, April. [Downloadable!] (restricted)
  18. Arnold C. Harberger, 1962. "The Incidence of the Corporation Income Tax," Journal of Political Economy, University of Chicago Press, vol. 70, pages 215. [Downloadable!] (restricted)
  19. Parry, Ian W. H., 1997. "Environmental taxes and quotas in the presence of distorting taxes in factor markets," Resource and Energy Economics, Elsevier, vol. 19(3), pages 203-220, August. [Downloadable!] (restricted)
  20. Browning, Edgar K., 1994. "The non-tax wedge," Journal of Public Economics, Elsevier, vol. 53(3), pages 419-433, March. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Ian Parry, 2001. "The Costs of Restrictive Trade Policies in the Presence of Factor Tax Distortions," International Tax and Public Finance, Springer, vol. 8(2), pages 147-170, March. [Downloadable!] (restricted)
    Other versions:
  2. Parry, Ian & Oates, Wallace, 1998. "Policy Analysis in a Second-Best World," Discussion Papers dp-98-48, Resources For the Future. [Downloadable!]
  3. Ian Parry, 2002. "Tax Deductions and the Marginal Welfare Cost of Taxation," International Tax and Public Finance, Springer, vol. 9(5), pages 531-552, September. [Downloadable!] (restricted)
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