A Theory of Optimal Tariffs under a Revenue Constraint
AbstractThis paper examines the optimal tariff structure under a revenue constraint. When a fixed level of tax revenue has to be collected from the tariff alone, no adjustment in tariff rates can achieve an efficient resource allocation, even in a small open economy. Hence, the optimal tariff problem arises under a revenue constraint. We show that the revenue-constrained optimal tariff structure is characterized by the following two rules: (i) the optimal tariff rate is lower for the import good that is a closer substitute for the export good; and (ii) the stronger the cross-substitutability between imports, the closer the optimal tariff is to uniformity. This theoretically explains why empirical studies have shown that the efficiency loss from a uniform tariff structure is negligible.
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Bibliographic InfoPaper provided by CIRJE, Faculty of Economics, University of Tokyo in its series CIRJE F-Series with number CIRJE-F-202.
Length: 27 pages
Date of creation: Mar 2003
Date of revision:
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This paper has been announced in the following NEP Reports:
- NEP-ALL-2003-03-19 (All new papers)
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