Potential Optimal Tariff Rates for Tanzania: A CGE Analysis

Computable General Equilibrium (CGE) models are usually presented as a set of simultaneous equations that describe the economic activities of consumers, producers, government, and traders in the markets for factors of production (inputs), and for goods and services (outputs). The supply and demand in each market is equilibrated by a market-clearing price. The model is called computable because simulation is used to find the prices that clear the markets for inputs and outputs. The models allow for the establishment of a direct link between economic structures as embodied in a social accounting matrix and policy changes. In this study a CGE model of Tanzania is used to endogenously determine revenue-neutral tax rates and the corresponding pareto-optimum capital adjustment that are needed to lower intermediate sales tax and import tax rates. The generic CGE model of Tanzania is presented based on the 2001 national social accounting matrix. The objective is to develop a detailed and suitable model for assessing impacts of new and potential macroeconomic policy options available for Tanzania. For illustration purposes, the model is used to endogenously determine revenue-neutral tax rate changes and the corresponding pareto optimum capital adjustment needed to lower intermediate input price by 20%, relative to import prices. The results indicate that lower tax rates will increase production for both domestic and export markets and lower price indices across the 2 board. However, total investment has to increase by more than 2% so as not to make all households at least as well-off as they were before the new taxes.