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Productivity Gaps and Tax Policies Under Asymmetric Trade

Listed author(s):
  • Lucas Bretschger

    ()

    (ETH Zürich, Switzerland)

  • Simone Valente

    ()

    (University of East Anglia, United Kingdom)

We build a two-country model of endogenous growth to study the welfare effects of taxes on tradable primary inputs when countries engage in asymmetric trade. We obtain explicit links between persistent gaps in productivity growth and the incentives of resource exporting (importing) countries to subsidize (tax) domestic resource use. The exporters' incentive to subsidize hinges on slower productivity growth and is disconnected from the importers' incentive to tax resource inflows i.e., rent extraction. Moreover, faster productivity growth exacerbates the im- porters' incentive to tax, beyond the rent-extraction motive. In a strategic tax game, the only equilibrium is of Stackelberg type and features, for a wide range of parameter values, positive exporters' subsidies and importers' taxes at the same time. The model predictions concerning the impact of resource taxes on relative income shares are supported by empirical evidence.

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File URL: http://www.cer.ethz.ch/content/dam/ethz/special-interest/mtec/cer-eth/cer-eth-dam/documents/working-papers/WP-16-239.pdf
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Paper provided by CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich in its series CER-ETH Economics working paper series with number 16/239.

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Length: 64 pages
Date of creation: Mar 2016
Handle: RePEc:eth:wpswif:16-239
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