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Revenue-enhancing Trade Liberalization in Developing Countries

Author

Listed:
  • Arijit Mukherjee

    () (University of Nottingham, UK and GEP, UK)

  • M. Emranul Haque

    () (University of Manchester, UK)

Abstract

Recovering revenue loss due to the reduction in import tariffs is a major concern of many developing economies. In an economy with free entry, which affects the product market competition, we show that, even if there is no other tax reform such as a profit tax reform, the market mechanism itself takes care of the loss of government revenue following a tariff reduction if entry is sufficiently costly. A compensatory profit tax to compensate the loss of government revenue following a tariff reduction is required for an intermediate level of entry cost. If the entry cost is very small, the loss of government revenue following a tariff reduction cannot be compensated even with a profit tax reform. Hence, the net effect of a tariff reduction on government revenue therefore depends on how much tariff and tax revenues are created by entry, which is affected by changes in both the tariff rate and the profit tax rate.

Suggested Citation

  • Arijit Mukherjee & M. Emranul Haque, 2009. "Revenue-enhancing Trade Liberalization in Developing Countries," Economics Bulletin, AccessEcon, vol. 29(3), pages 2275-2281.
  • Handle: RePEc:ebl:ecbull:eb-09-00467
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    File URL: http://www.accessecon.com/Pubs/EB/2009/Volume29/EB-09-V29-I3-P73.pdf
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    References listed on IDEAS

    as
    1. Emran, M. Shahe & Stiglitz, Joseph E., 2005. "On selective indirect tax reform in developing countries," Journal of Public Economics, Elsevier, vol. 89(4), pages 599-623, April.
    2. Hatzipanayotou, Panos & Michael, Michael S. & Miller, Stephen M., 1994. "Win-win indirect tax reform : A modest proposal," Economics Letters, Elsevier, vol. 44(1-2), pages 147-151.
    3. 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 615-625, June.
    4. 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.
    5. Mujumdar, Sudesh, 2004. "Revenue implications of trade liberalization under imperfect competition," Economics Letters, Elsevier, vol. 82(1), pages 83-89, January.
    6. 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.
    7. 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.
    8. Haque, M. Emranul & Mukherjee, Arijit, 2005. "On the revenue implications of trade liberalization under imperfect competition," Economics Letters, Elsevier, vol. 88(1), pages 27-31, July.
    9. Panagariya, Arvind, 1992. "Input tariffs, duty drawbacks, and tariff reforms," Journal of International Economics, Elsevier, vol. 32(1-2), pages 131-147, February.
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    Citations

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    Cited by:

    1. Kieun Shim & Kyonghwa Jeong, 2016. "Revenue-enhancing Trade Liberalization in a Differentiated Duopoly," Review of Development Economics, Wiley Blackwell, vol. 20(2), pages 561-573, May.

    More about this item

    Keywords

    Free Entry; Entry Cost; Trade Liberalization;

    JEL classification:

    • F1 - International Economics - - Trade
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue

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