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Tariff-Tax Reforms in Large Economies

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Author Info

  • Juha Tervala
  • Giovanni Ganelli

Abstract

This paper studies tariff-tax reforms in a calibrated two-region global New Keynesian model composed of a developing and an advanced region. In our baseline calibration, a revenue-neutral reform that lowers tariffs in developing countries can reduce domestic welfare. The reason is that the increase in developing countries welfare due to higher output is dominated by the welfare losses stemming from the deterioration of the terms of trade. On the other hand, the reform increases output and welfare in the advanced countries and in the world as a whole. The effects that we highlight have not been studied in previous contributions to the literature, which typically looks at tariff-tax reforms using a small open economy framework. Nominal rigidities have important implications for adjustment dynamics in our model. In the case of a "point-for-point" reform, for example, price stickiness implies that the international dynamics of output is reversed compared to a revenue neutral reform.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 12/139.

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Length: 32
Date of creation: 01 May 2012
Date of revision:
Handle: RePEc:imf:imfwpa:12/139

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Related research

Keywords: Trade liberalization; Consumption taxes; Developing countries; Economic models; Tariff reforms; Tax increases; Tax reforms; Tax revenues; Terms of trade; tax reform; consumption tax; tariff rate; domestic consumption; open economy; tariff reduction; global welfare; tariff revenue; imperfect competition; elasticity of substitution; tariff reductions; tariff structure; tariff rates; trade taxes; trade model; open economies; trade negotiations; revenue collection; trade effect; tariff reform; domestic economy; perfect competition; import tariffs; domestic price; political economy; tariff revenues; domestic price index; domestic tax; reduction in tariffs; import tariff; tariff cuts; domestic firms; round agreement; domestic prices; unit of labor; international trade; tariff cut; tariff changes; applied tariff; tariff liberalization; domestic goods; indirect tax; world demand; average tariff; domestic tax reform; trade barriers; increasing consumption; corporate income tax; effective tax rates; tariff concessions; regional trade agreements; average tariff rate; international trade taxes; national policies; tax ratios; liberalization efforts; distortionary effect; world trade organization; protected goods; regional trade; imported goods; world economy; tax rate changes; nominal interest rate; trade relations; tax shocks; reducing tariffs; world trade; nominal interest rates; dynamic effects; process of trade liberalization; border taxes; tax structure; increased trade; import tariff structure; income tax rates; domestic ones; tax structures; trade agreements; volume of trade; total tax burden; tax collection; trade integration; average tariff rates; vat rate; trade restrictions; unilateral reforms; tax incentives; optimal taxation;

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References

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  1. 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.
  2. Reint Gropp & Liam P. Ebrill & Janet Gale Stotsky, 1999. "Revenue Implications of Trade Liberalization," IMF Occasional Papers 180, International Monetary Fund.
  3. Hatta, Tatsuo, 1977. "A Recommendation for a Better Tariff Structure," Econometrica, Econometric Society, vol. 45(8), pages 1859-69, November.
  4. Kreickemeier, Udo & Raimondos-Møller, Pascalis, 2006. "Tariff-Tax Reforms and Market Access," Working Papers 06-2006, Copenhagen Business School, Department of Economics.
  5. Naito, Takumi, 2006. "Tariff and tax reform: Dynamic implications," Journal of International Economics, Elsevier, vol. 68(2), pages 504-517, March.
  6. Bown, Chad P. & Crowley, Meredith A., 2006. "Policy externalities: How US antidumping affects Japanese exports to the EU," European Journal of Political Economy, Elsevier, vol. 22(3), pages 696-714, September.
  7. M. Shahe Emran & Joseph E. Stiglitz, 2002. "On Selective Indirect Tax Reform in Developing Countries," International Trade 0210003, EconWPA.
  8. Betts, Caroline & Devereux, Michael B., 2000. "Exchange rate dynamics in a model of pricing-to-market," Journal of International Economics, Elsevier, vol. 50(1), pages 215-244, February.
  9. Yu, Jun & Zhang, Shunming, 2011. "Optimal trade policy in tariff games with inside money," Economic Modelling, Elsevier, vol. 28(4), pages 1604-1614, July.
  10. Luis-Felipe Zanna & Olivier Basdevant & Susan Yang & Geneviève Verdier & Joannes Mongardini & Borislava Mircheva & Dalmacio Benicio, 2011. "The Design of Fiscal Adjustment Strategies in Botswana, Lesotho, Namibia, and Swaziland," IMF Working Papers 11/266, International Monetary Fund.
  11. Keen, Michael & Ligthart, Jenny E., 2002. "Coordinating tariff reduction and domestic tax reform," Journal of International Economics, Elsevier, vol. 56(2), pages 489-507, March.
  12. Emmanuel Dhyne & Luis J. Alvarez & Herve Le Bihan & Giovanni Veronese & Daniel Dias & Johannes Hoffmann & Nicole Jonker & Patrick Lunnemann & Fabio Rumler & Jouko Vilmunen, 2006. "Price Changes in the Euro Area and the United States: Some Facts from Individual Consumer Price Data," Journal of Economic Perspectives, American Economic Association, vol. 20(2), pages 171-192, Spring.
  13. Fukushima, Takashi, 1979. "Tariff Structure, Nontraded Goods and Theory of Piecemeal Policy Recommendations," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 20(2), pages 427-35, June.
  14. Miles S. Kimball & Matthew D. Shapiro, 2008. "Labor Supply: Are the Income and Substitution Effects Both Large or Both Small?," NBER Working Papers 14208, National Bureau of Economic Research, Inc.
  15. Michael, Michael S. & Hatzipanayotou, Panos & Miller, Stephen M., 1993. "Integrated reforms of tariffs and consumption taxes," Journal of Public Economics, Elsevier, vol. 52(3), pages 417-428, October.
  16. Emi Nakamura & Jón Steinsson, 2008. "Five Facts about Prices: A Reevaluation of Menu Cost Models," The Quarterly Journal of Economics, MIT Press, vol. 123(4), pages 1415-1464, November.
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