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Public Investment, Tax Evasion and Welfare Effects of a Tariff Reform

  • Manoj Atolia


    (Department of Economics, Florida State University)

Contrary to the case considered in literature, the experience of developing countries indicates that the tariff reforms have not been revenue neutral due to the heavy dependence of developing countries on trade taxes and pervasive tax evasion. In contrast to the plausibility of a welfare loss shown by the current literature, when the adverse effect of the loss of tariff revenue on public investment is factored in, the welfare outcome of the tariff reforms of past few decades turns out to be much more pessimistic. The constraints imposed by tariff dependence and tax evasion imply that future tariff reforms in these countries should be undertaken after strengthening their domestic tax system and augmenting the ability of their governments to fight tax evasion. For countries of sub-Saharan Africa, where such reforms are likely to be concentrated, this would need planning and capacity building over a longer time horizon.

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Paper provided by Department of Economics, Florida State University in its series Working Papers with number wp2003_10_01.

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Length: 39
Date of creation: Oct 2003
Date of revision: Oct 2008
Handle: RePEc:fsu:wpaper:wp2003_10_01
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  19. Michael Keen & Johanna Elisabeth Ligthart, 1999. "Coordinating Tariff Reduction and Domestic Tax Reform," IMF Working Papers 99/93, International Monetary Fund.
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