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

Author

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  • Naito, H.

Abstract

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.

Suggested Citation

  • Naito, H., 1996. "Tariffs and Production Subsidies as Devices to Relax the Incentive Problem of a Progressive Income Tax System," Working Papers 391, Research Seminar in International Economics, University of Michigan.
    • Handle: RePEc:mie:wpaper:391
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    Citations

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    Cited by:

    1. Saez, Emmanuel, 2004. "Direct or indirect tax instruments for redistribution: short-run versus long-run," Journal of Public Economics, Elsevier, vol. 88(3-4), pages 503-518, March.
    2. Philippe Bontems & Estelle Gozlan, 2018. "Trade, environment, and income inequality: An optimal taxation approach," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 20(4), pages 557-581, August.
    3. Naito, Hisahiro, 1999. "Re-examination of uniform commodity taxes under a non-linear income tax system and its implication for production efficiency," Journal of Public Economics, Elsevier, vol. 71(2), pages 165-188, February.

    More about this item

    Keywords

    TARIFFS ; PRODUCTION ; INFORMATION;
    All these keywords.

    JEL classification:

    • F10 - International Economics - - Trade - - - General
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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