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Trade Reform with a Government Budget Constraint

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  • James E. Anderson

Abstract

The standard theory of trade reform uses a passive government budget constraint, in which changes in tariff revenue are offset by changes in lump sum transfers. This paper offers a general framework for the analysis of trade reform when the government budget constraint is active, meaning that tariff revenue cuts must be offset by distortionary fiscal policy changes --- public good supply cuts or alternative tax increases. Useful and simple new expressions characterizing welfare improving trade reform compare the Marginal Cost of Funds (MCF) of trade taxes with the MCF of consumption taxes. The MCF expressions provide an intuitive index number which is operational with Computable General Equilibrium models. The theoretical analysis and an application to Korean data in 1963 both cast doubt on the desirability of tariff cuts in convex competitive economies with active government budget constraints.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5827.

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Date of creation: Nov 1996
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Publication status: published as in Trade Policy and the Pacific Rim, J.Piggott and A.Woodland, eds., MacMilan for the IEA, 1999.
Handle: RePEc:nbr:nberwo:5827

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  1. Squire, Lyn, 1989. "Project evaluation in theory and practice," Handbook of Development Economics, Elsevier, in: Hollis Chenery & T.N. Srinivasan (ed.), Handbook of Development Economics, edition 1, volume 2, chapter 21, pages 1093-1137 Elsevier.
  2. 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, American Economic Association, vol. 82(3), pages 615-25, June.
  3. Gene M. Grossman & Elhanan Helpman, 1992. "Protection For Sale," NBER Working Papers 4149, National Bureau of Economic Research, Inc.
  4. Hatta, Tatsuo, 1977. "A Theory of Piecemeal Policy Recommendations," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 44(1), pages 1-21, February.
  5. 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, Wiley Blackwell, vol. 56(2), pages 199-215, April.
  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, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 33(1), pages 209-22, February.
  7. 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, American Economic Association, vol. 61(5), pages 925-31, December.
  8. 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, American Economic Association, vol. 75(1), pages 128-38, March.
  9. Bruno, Michael, 1972. "Market Distortions and Gradual Reform," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 39(3), pages 373-83, July.
  10. Rod Falvey, 1994. "Revenue enhancing tariff reform," Review of World Economics (Weltwirtschaftliches Archiv), Springer, Springer, vol. 130(1), pages 175-190, March.
  11. James E. Anderson & Will Martin, 1996. "The Welfare Analysis of Fiscal Policy: A Simple Unified Account," Boston College Working Papers in Economics, Boston College Department of Economics 316., Boston College Department of Economics.
  12. Anderson, James E. & Young, Leslie, 1992. "Optimal taxation and debt in an open economy," Journal of Public Economics, Elsevier, Elsevier, vol. 47(1), pages 27-57, February.
  13. Foster, Edward & Sonnenschein, Hugo, 1970. "Price Distortion and Economic Welfare," Econometrica, Econometric Society, Econometric Society, vol. 38(2), pages 281-97, March.
  14. Devarajan, Shantayanan & Squire, Lyn & Suthiwart-Narueput, Sethaput, 1995. "Reviving project appraisal at the World Bank," Policy Research Working Paper Series 1496, The World Bank.
  15. Lloyd, P. J., 1974. "A more general theory of price distortions in open economies," Journal of International Economics, Elsevier, Elsevier, vol. 4(4), pages 365-386, November.
  16. Peter A. Diamond & J. A. Mirrlees, 1968. "Optimal Taxation and Public Production," Working papers 22, Massachusetts Institute of Technology (MIT), Department of Economics.
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Cited by:
  1. Joseph E. Stiglitz & M. Shahe Emran, 2004. "Price Neutral Tax reform With an Informal Economy," Econometric Society 2004 North American Summer Meetings 493, Econometric Society.
  2. Emran, M. Shahe, 2005. "Revenue-increasing and welfare-enhancing reform of taxes on exports," Journal of Development Economics, Elsevier, Elsevier, vol. 77(1), pages 277-292, June.
  3. Keiko Kubota, 2005. "Fiscal Constraints, Collection Costs, And Trade Policies," Economics and Politics, Wiley Blackwell, Wiley Blackwell, vol. 17, pages 129-150, 03.
  4. Neary, J Peter, 1997. "Pitfalls in the Theory of International Trade Policy: Concertina Reforms of Tariffs and Subsidies to HIgh-Technology Industries," CEPR Discussion Papers, C.E.P.R. Discussion Papers 1740, C.E.P.R. Discussion Papers.
  5. James E. Anderson, 1997. "Revenue Neutral Trade Reform with Many Households, Quotas and Tariffs," NBER Working Papers 6181, National Bureau of Economic Research, Inc.
  6. 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.
  7. Michael Keen, 2007. "VAT attacks!," International Tax and Public Finance, Springer, Springer, vol. 14(4), pages 365-381, August.
  8. M. Shahe Emran & Joseph E. Stiglitz, 2002. "On Selective Indirect Tax Reform in Developing Countries," International Trade, EconWPA 0210003, EconWPA.
  9. 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, Elsevier, vol. 49(3), pages 944-970, August.
  10. James E. Anderson, 1999. "Trade Reform Diagnostics with Many Households, Quotas, and Tariffs," Boston College Working Papers in Economics, Boston College Department of Economics 417, Boston College Department of Economics, revised 03 May 2000.
  11. Michael Keen, 2007. "VAT, Tariffs, and withholding," IMF Working Papers 07/174, International Monetary Fund.
  12. Can Erbil, 2004. "Trade Taxes Are Expensive," International Trade, EconWPA 0409002, EconWPA.

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