The Dynamics of Revenue-Neutral Trade Liberalization
AbstractThe 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 InfoPaper 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.
Length: 46 pages
Date of creation: 21 Dec 2011
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Web page: http://aysps.gsu.edu/isp/index.html
Tariff reform; coordinated tax-tariff reform; consumption tax reform; trade liberalization;
Other versions of this item:
- Ligthart, J.E. & Meijden, G.C. van der, 2011. "The Dynamics of Revenue-Neutral Trade Liberalization," Discussion Paper 2011-142, Tilburg University, Center for Economic Research.
- F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
- F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
- H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
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