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Joint Trade Liberalization and Tax Reform in a Small Open Economy: The Case of Egypt

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  • Denise Eby Konan

    (Department of Economics, University of Hawaii at Manoa)

  • Keith Maskus

Abstract

We develop a computable general equilibrium model of the Egyptian economy. The model is suitable for analyzing the impacts of reforms in the tax system, the trade-policy regime, or both taken together. A two-sector, general-equilibrium model is presented diagrammatically to illustrate the separate and joint effects of distortionary capital taxes, consumption taxes, and tariffs. Thus, trade or tax reform may be undertaken conditionally upon maintenance of the other distortions or may be undertaken in a combined policy package. We compute the welfare gains from various policy changes, along with impacts on the real exchange rate and on real factor prices, allowing tax rates to vary endogenously to satisfy a fixed real revenue target for the Egyptian government. Scenarios include removal or unification of the consumption tax, the capital tax. Or both, and tariff unification, a free-trade agreement with the European Union, and unilateral tariff elimination. Welfare effects depend critically on the reform undertaken and the type of replacement tax. While both are important, neither trade-policy reform nor tax reform dominates. We also calculate interaction effects between policy regimes.

Suggested Citation

  • Denise Eby Konan & Keith Maskus, 1997. "Joint Trade Liberalization and Tax Reform in a Small Open Economy: The Case of Egypt," Working Papers 199703-R, University of Hawaii at Manoa, Department of Economics.
    • Handle: RePEc:hai:wpaper:199703
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    More about this item

    Keywords

    tax reform; trade liberalization; welfare gain;
    All these keywords.

    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F15 - International Economics - - Trade - - - Economic Integration
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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