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Coordinated Tax-Tariff Reforms, Informality, and Welfare Distribution

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  • Jenny Ligthart
  • Gerard C. van der Meijden

Abstract

The paper studies the revenue, efficiency, and distributional implications of a simple strategy of offsetting tariff reductions with increases in destination-based consumption taxes so as to leave consumer prices unchanged. We employ a dynamic micro-founded macroeconomic model of a small open developing economy, which features an informal sector that cannot be taxed, a formal agricultural sector, and an import-substitution sector. The reform strategy increases government revenue, imports, exports, and the informal sector. In contrast to Emran and Stiglitz (2005), who ignore the dynamic effects of taxes and tariffs on factor markets, we find an efficiency gain, which is unevenly distributed. Existing generations benefit more than future generations, who - depending on pre-existing tax and tariff rates and the informal sector size - even may become worse off.

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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3107.

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Date of creation: 2010
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Handle: RePEc:ces:ceswps:_3107

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Keywords: tariff reform; consumption tax reform; informal sector; home production; transitional dynamics; overlapping generations; second-best outcome;

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Citations

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Cited by:
  1. Yu-Fu Chen & Michael Funke, 2010. "Global Warming and Extreme Events: Rethinking the Timing and Intensity of Environmental Policy," CESifo Working Paper Series 3139, CESifo Group Munich.
  2. Chen, Yu-Fu & Funke, Michael, 2010. "Global Warming And Extreme Events: Rethinking The Timing And Intensity Of Environmental Policy," SIRE Discussion Papers, Scottish Institute for Research in Economics (SIRE) 2010-48, Scottish Institute for Research in Economics (SIRE).
  3. Ligthart, J.E. & Meijden, G.C. van der, 2011. "The Dynamics of Revenue-Neutral Trade Liberalization," Discussion Paper, Tilburg University, Center for Economic Research 2011-142, Tilburg University, Center for Economic Research.
  4. Sokolovska, Olena & Sokolovskyi, Dmytro, 2011. "The effect of tax-tariff reform: evidence from Ukraine," MPRA Paper 42643, University Library of Munich, Germany.

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