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Optimal tariffs, optimal taxes and economic development

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  • Michael Loewy

Abstract

Cross-section and time-series data suggest that nations substitute income taxes for tariffs as they develop. This paper confronts the data within the context of a two-country open-economy endogenous growth model in which public expenditure is financed by an optimal tariff and income tax. When the latter is subject to administrative costs, the model predicts that the government will optimally substitute the income tax for the tariff as output rises along the transition. The model is calibrated and a simulation yields time paths for the shares of total government revenue derived from the tariff and the income tax that are consistent with the data.

Suggested Citation

  • Michael Loewy, 2001. "Optimal tariffs, optimal taxes and economic development," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 13(4), pages 461-486.
  • Handle: RePEc:taf:jitecd:v:13:y:2001:i:4:p:461-486
    DOI: 10.1080/0963819042000300618
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    Cited by:

    1. Zhang, Yan, 2008. "Tariff and Equilibrium Indeterminacy--(II)," MPRA Paper 10043, University Library of Munich, Germany.
    2. Manoj Atolia, 2003. "Public Investment, Tax Evasion and Welfare Effects of a Tariff Reform," Working Papers wp2003_10_01, Department of Economics, Florida State University, revised Oct 2008.
    3. Zhang, Yan, 2009. "Tariff and Equilibrium Indeterminacy," MPRA Paper 13099, University Library of Munich, Germany.

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    Keywords

    Optimal tariffs; optimal taxes; growth;

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