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Tax devaluation with endogenous margins

Author

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  • Pascal Belan

    (THEMA - Théorie économique, modélisation et applications - UCP - Université de Cergy Pontoise - Université Paris-Seine - CNRS - Centre National de la Recherche Scientifique)

  • Clément Carbonnier

    (THEMA - Théorie économique, modélisation et applications - UCP - Université de Cergy Pontoise - Université Paris-Seine - CNRS - Centre National de la Recherche Scientifique)

  • Martine Carré

    (LEDa - Laboratoire d'Economie de Dauphine - Université Paris-Dauphine)

Abstract

Several European countries have recently envisaged to implement fiscal policies that constitute alternatives to monetary devaluation in the context of a monetary union. Social value-added tax is one of these alternatives: it consists to shift fiscal revenue from payroll tax to value-added tax, with the objective to address simultaneously competitiveness and employment problems. We analyze the consequence of such a policy in a model of international trade with heterogeneous firm à la Melitz. We depart from the CES case for taking account of the way changes in the tax rates may mo dify competition between producers, their margins, and the way these changes are refefected in prices. We first show that social VAT is neutral for zero trade balances. Then, in a two-country model, we show that, after the introduction of the social VAT, intensive and extensive margins increase in the net importing country regardless of the country that implements the policy. Both margins decrease in the net exporting country. Considering non-CES utility functions, the effects of social VAT are attenuated (amplified) if love for variety increases (decreases) with quantities

Suggested Citation

  • Pascal Belan & Clément Carbonnier & Martine Carré, 2017. "Tax devaluation with endogenous margins," Working Papers hal-01515806, HAL.
  • Handle: RePEc:hal:wpaper:hal-01515806
    Note: View the original document on HAL open archive server: https://hal.archives-ouvertes.fr/hal-01515806
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    References listed on IDEAS

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    1. Thomas Chaney, 2008. "Distorted Gravity: The Intensive and Extensive Margins of International Trade," American Economic Review, American Economic Association, vol. 98(4), pages 1707-1721, September.
    2. Anna Lipinska & Leopold von Thadden, 2012. "On the (in)effectiveness of fiscal devaluations in a monetary union," Finance and Economics Discussion Series 2012-71, Board of Governors of the Federal Reserve System (U.S.).
    3. Marc J. Melitz & Gianmarco I. P. Ottaviano, 2008. "Market Size, Trade, and Productivity," Review of Economic Studies, Oxford University Press, vol. 75(1), pages 295-316.
    4. Elhanan Helpman & Marc J. Melitz & Stephen R. Yeaple, 2004. "Export Versus FDI with Heterogeneous Firms," American Economic Review, American Economic Association, vol. 94(1), pages 300-316, March.
    5. Gianmarco Ottaviano & Takatoshi Tabuchi & Jacques-FranÁois Thisse, 2002. "Agglomeration and Trade Revisited," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 43(2), pages 409-436, May.
    6. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June.
    7. Sam Peltzman, 2000. "Prices Rise Faster than They Fall," Journal of Political Economy, University of Chicago Press, vol. 108(3), pages 466-502, June.
    8. Stéphane Gauthier, 2009. "Un exercice de TVA sociale," Économie et Prévision, Programme National Persée, vol. 187(1), pages 65-81.
    9. Carbonnier, Clement, 2007. "Who pays sales taxes? Evidence from French VAT reforms, 1987-1999," Journal of Public Economics, Elsevier, vol. 91(5-6), pages 1219-1229, June.
    10. Carbonnier Clément, 2013. "Pass-through of Per Unit and ad Valorem Consumption Taxes: Evidence from Alcoholic Beverages in France," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 13(2), pages 837-863, September.
    11. Donald S. Kenkel, 2005. "Are Alcohol Tax Hikes Fully Passed Through to Prices? Evidence from Alaska," American Economic Review, American Economic Association, vol. 95(2), pages 273-277, May.
    12. Marc J. Melitz, 2003. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," Econometrica, Econometric Society, vol. 71(6), pages 1695-1725, November.
    13. Marc J. Melitz & Gianmarco I. P. Ottaviano, 2008. "Market Size, Trade, and Productivity (DOI:10.111/j.1467-937x.2007.00463.x)," Review of Economic Studies, Oxford University Press, vol. 75(3), pages 985-985.
    14. Isabel Horta Correia, 2011. "Fiscal devaluation," Economic Bulletin and Financial Stability Report Articles and Banco de Portugal Economic Studies, Banco de Portugal, Economics and Research Department.
    15. Philippe Andrade, 2010. "Competition and Pass-through on international markets: Firm-level evidence from VAT shocks," 2010 Meeting Papers 820, Society for Economic Dynamics.
    16. repec:dau:papers:123456789/11165 is not listed on IDEAS
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    Keywords

    Fiscal devaluation; social VAT; tax reform; international trade;

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