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Trade Reform with a Government Budget Constraint

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  • James E. Anderson

    ()
    (Boston College)

Abstract

The theory of trade reform typically is based on a passive government budget constraint, in which changes in tariff revenue are costlessly offset by lump sum transfers. This paper offers a general framework for trade reform when the government budget constraint is active, such that tariff revenue cuts must be offset by public good decreases or other tax increases. The trade reform and public finance literatures are integrated to develop some useful and simple new expressions characterizing welfare improving trade reform. The expressions are operational with Computable General Equilibrium models. The theoretical analysis and an application to Korean data in 1963 cast doubt of the desirability of tariff cuts in convex competitive economies with active government budget constraints.

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Bibliographic Info

Paper provided by Boston College Department of Economics in its series Boston College Working Papers in Economics with number 348..

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Length: 31 pages
Date of creation: 01 Jan 1997
Date of revision:
Publication status: published in Trade Policy and the Pacific Rim, J. Piggott and A. Woodland, eds., Macmillan for the International Economic Association, 1999.
Handle: RePEc:boc:bocoec:348

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Keywords: Marginal cost of funds; trade reform;

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References

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  1. Grossman, G.M. & Helpman, E., 1992. "Protection for Sale," Papers 162, Princeton, Woodrow Wilson School - Public and International Affairs.
  2. Anderson, James E. & Young, Leslie, 1992. "Optimal taxation and debt in an open economy," Journal of Public Economics, Elsevier, vol. 47(1), pages 27-57, February.
  3. Squire, Lyn, 1989. "Project evaluation in theory and practice," Handbook of Development Economics, in: Hollis Chenery & T.N. Srinivasan (ed.), Handbook of Development Economics, edition 1, volume 2, chapter 21, pages 1093-1137 Elsevier.
  4. Diewert, W E & Turunen-Red, A H & Woodland, A D, 1989. "Productivity- and Pareto-Improving Changes in Taxes and Tariffs," Review of Economic Studies, Wiley Blackwell, vol. 56(2), pages 199-215, April.
  5. Bruno, Michael, 1972. "Market Distortions and Gradual Reform," Review of Economic Studies, Wiley Blackwell, vol. 39(3), pages 373-83, July.
  6. Abe, Kenzo, 1992. "Tariff Reform in a Small Open Economy with Public Production," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 33(1), pages 209-22, February.
  7. Devarajan, Shantayanan & Squire, Lyn & Suthiwart-Narueput, Sethaput, 1995. "Reviving project appraisal at the World Bank," Policy Research Working Paper Series 1496, The World Bank.
  8. Foster, Edward & Sonnenschein, Hugo, 1970. "Price Distortion and Economic Welfare," Econometrica, Econometric Society, vol. 38(2), pages 281-97, March.
  9. Lloyd, P. J., 1974. "A more general theory of price distortions in open economies," Journal of International Economics, Elsevier, vol. 4(4), pages 365-386, November.
  10. Hatta, Tatsuo, 1977. "A Theory of Piecemeal Policy Recommendations," Review of Economic Studies, Wiley Blackwell, vol. 44(1), pages 1-21, February.
  11. Lopez, Ramon & Panagariya, Arvind, 1992. "On the Theory of Piecemeal Tariff Reform: The Case of Pure Imported Intermediate Inputs," American Economic Review, American Economic Association, vol. 82(3), pages 615-25, June.
  12. Peter A. Diamond & J. A. Mirrlees, 1968. "Optimal Taxation and Public Production," Working papers 22, Massachusetts Institute of Technology (MIT), Department of Economics.
  13. 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.
  14. James E. Anderson & Will Martin, 1996. "The Welfare Analysis of Fiscal Policy: A Simple Unified Account," Boston College Working Papers in Economics 316., Boston College Department of Economics.
  15. Bertrand, Trent J & Vanek, Jaroslav, 1971. "The Theory of Tariffs, Taxes, and Subsidies: Some Aspects of the Second Best," American Economic Review, American Economic Association, vol. 61(5), pages 925-31, December.
  16. Rod Falvey, 1994. "Revenue enhancing tariff reform," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 130(1), pages 175-190, March.
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Citations

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Cited by:
  1. Anderson, James E, 2002. "Trade Reform Diagnostics with Many Households, Quotas, and Tariffs," Review of International Economics, Wiley Blackwell, vol. 10(2), pages 215-36, May.
  2. Kubota, Keiko, 2000. "Fiscal constraints, collection costs, and trade policies," Policy Research Working Paper Series 2366, The World Bank.
  3. Anderson, James E., 1997. "Revenue Neutral Trade Reform with Many Households, Quotas and Tariffs," Seminar Papers 626, Stockholm University, Institute for International Economic Studies.
  4. Michael Keen, 2007. "VAT, Tariffs, and withholding," IMF Working Papers 07/174, International Monetary Fund.
  5. J.P. Neary, 1997. "Pitfalls in the Theory of International Trade Policy: Concertina Reforms of Tariffs and Subsidies to High Technology Industries," CEP Discussion Papers dp0346, Centre for Economic Performance, LSE.
  6. San Vicente Portes, Luis, 2009. "On the distributional effects of trade policy: Dynamics of household saving and asset prices," The Quarterly Review of Economics and Finance, Elsevier, vol. 49(3), pages 944-970, August.
  7. M. Shahe Emran & Joseph E. Stiglitz, 2002. "On Selective Indirect Tax Reform in Developing Countries," International Trade 0210003, EconWPA.
  8. M. Shahe Emran & Joseph E. Stiglitz, 2004. "Price-neutral Tax Reform With an Informal Economy," Public Economics 0407010, EconWPA.
  9. Anderson, James E. & Martin, Will, 1998. "Evaluating public expenditures when governments must rely on distortionary taxation," Policy Research Working Paper Series 1981, The World Bank.
  10. Can Erbil, 2004. "Trade Taxes Are Expensive," International Trade 0409002, EconWPA.
  11. Michael Keen, 2007. "VAT attacks!," International Tax and Public Finance, Springer, vol. 14(4), pages 365-381, August.
  12. Emran, M. Shahe, 2005. "Revenue-increasing and welfare-enhancing reform of taxes on exports," Journal of Development Economics, Elsevier, vol. 77(1), pages 277-292, June.

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