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The Dynamics of Revenue-Neutral Trade Liberalization

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  • Jenny Ligthart

    ()
    (Department of Economics and CentER, Tilburg, University)

  • Gerard C. van der Meijdenz

    ()
    (Department of Economics and CentER, Tilburg, University)

Abstract

The paper studies the dynamic welfare and macroeconomic effects of a revenue-neutral strategy of offsetting tariff reductions with increases in destination-based consumption taxes. To this end, we employ a dynamic general equilibrium model of a small open developing economy, featuring endogenous labor supply and sector-specifc capital and land. In contrast to conventional results from tax-tariff reform studies based on fixed factor endowments, we and that instantaneous utility and the volume of trade fall on impact. Aggregate output rises in the short run, refl ecting increased labor supply and a more efficient allocation of resources across sectors. In the long run, however, aggregate output declines, whereas instantaneous utility and the volume of trade increase compared to the pre-reform equilibrium. For a plausible calibration of the model, lifetime welfare is shown to increase.

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Bibliographic Info

Paper provided by International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University in its series International Center for Public Policy Working Paper Series, at AYSPS, GSU with number paper1124.

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Length: 46 pages
Date of creation: 21 Dec 2011
Date of revision:
Handle: RePEc:ays:ispwps:paper1124

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Related research

Keywords: Tariff reform; coordinated tax-tariff reform; consumption tax reform; trade liberalization;

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Cited by:
  1. Juha Tervala & Giovanni Ganelli, 2012. "Tariff-Tax Reforms in Large Economies," IMF Working Papers 12/139, International Monetary Fund.

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