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Tariffs and Production Subsidies as Devices to Relax the Incentive Problem of a Progressive Income Tax System

  • Naito, H.

This paper shows that tariffs and production subsidies can Pareto-improve welfare in a small open economy when a government is concerned with income redistribution under asymmetric information. In international trade theory, free trade is optimal if the government can use lump-sum taxes and transfers. However, in reality the government cannot use the lump-sum taxes and trabsfers due to asymmetric information between the government and individuals. In this case the government needs to use a progressive incomem tax system for income redistribution. This paper shows that in such a situation even if the goverment use Pareto-optimal progressive income tax system used free trade, tariffs can Pareto-improve welfare.

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Paper provided by Research Seminar in International Economics, University of Michigan in its series Working Papers with number 391.

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Length: 36 pages
Date of creation: 1996
Date of revision:
Handle: RePEc:mie:wpaper:391
Contact details of provider: Postal: ANN ARBOR MICHIGAN 48109
Web page: http://fordschool.umich.edu/rsie/

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