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Trade Taxes are Better?!?

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  • Erbil, Can

Abstract

The main purpose of this paper is to find out more about welfare implications of trade reforms with a government budget constraint by expanding the study of Anderson (1999). A simple general equilibrium model with distortionary indirect taxes and an “active” government budget constraint is employed to analyze the welfare implications of a trade reform. Unlike the conventional trade theory, the tariff revenue cuts due to the tariff reform must be compensated with increases in indirect taxes and not simply assuming lump sum transfers. The concept of “Marginal Cost of Funds” (MCF) from the public finance literature is utilized to find out whether the prospective change is welfare improving or not. The empirical part of the paper generates MCF figures, which answer the question; “is replacing trade taxes with indirect taxes always beneficial?” The results are of special interest to developing countries, which rely on trade taxes as a significant source of their government revenue, as well as for organizations such as the WTO, World Bank or the IMF.

Suggested Citation

  • Erbil, Can, 2001. "Trade Taxes are Better?!?," Conference papers 330921, Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project.
    • Handle: RePEc:ags:pugtwp:330921
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    File URL: https://ageconsearch.umn.edu/record/330921/files/2577.pdf
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    References listed on IDEAS

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    1. Mohamed Hedi Bchir & Lionel Fontagné & Sébastien Jean, 2005. "From Bound Duties to Actual Protection: Industrial Liberalisation in the Doha Round," Economics Working Papers 041, European Network of Economic Policy Research Institutes.
    2. Elbehri, Aziz & Hertel, Thomas, 2006. "A Comparative Analysis of the EU-Morocco FTA vs. Multilateral Liberalization," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 21, pages 496-525.
    3. Kuiper, Marijke & van Tongeren, Frank, 2005. "Which road to liberalization in the Mediterranean? Analyzing different regional trade liberalization scenarios for Morocco and Tunisia," Conference papers 331404, Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project.
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