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Rents, Regulation, and Indirect Tax Design

  • Carlo Perroni
  • John Whalley

This paper discusses the implications of rents and regulations which support them for the design of indirect taxes such as VATS. Intuition suggests high tax rates on industries or products with rents; but we argue that whether rents are natural (due to fixed factors) or market structure related (monopolistic) makes a large difference. In the latter case, a high tax may induce adverse behavioral changes. We develop a general equilibrium tax model based on Canadian data and which incorporates both types of rent, and we use numerical simulation analysis to explore the implications of different types of rents for the design of indirect taxes. Our results suggest that the ways in which taxes should deviate from uniformity depends crucially on the mechanisms that generate rents. They also imply that a broadly based uniform tax will typically not be the optimal choice for economies where rents represent a significant share of value added, even when preferences are homothetic. Finally, they demonstrate that the presence of rents substantially affects measures of the social costs of indirect taxes, both in total and at the margin, and in both directions depending upon the nature of the rents involved.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4358.

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Date of creation: May 1993
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Handle: RePEc:nbr:nberwo:4358
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  1. Charles L. Ballard & Don Fullerton & John B. Shoven & John Whalley, 1985. "A General Equilibrium Model for Tax Policy Evaluation," NBER Books, National Bureau of Economic Research, Inc, number ball85-1, August.
  2. Alan J. Auerbach, 1982. "The Theory of Excess Burden and Optimal Taxation," NBER Working Papers 1025, National Bureau of Economic Research, Inc.
  3. Krueger, Anne O, 1974. "The Political Economy of the Rent-Seeking Society," American Economic Review, American Economic Association, vol. 64(3), pages 291-303, June.
  4. Clarete, Ramon L. & Whalley, John, 1987. "Comparing the marginal welfare costs of commodity and trade taxes," Journal of Public Economics, Elsevier, vol. 33(3), pages 357-362, August.
  5. Deaton, Angus, 1981. "Optimal Taxes and the Structure of Preferences," Econometrica, Econometric Society, vol. 49(5), pages 1245-60, September.
  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. repec:cup:cbooks:9780521266550 is not listed on IDEAS
  8. Anderson, F.J., 1993. "Issues in a Natural Resources Economy," UWO Department of Economics Working Papers 9304, University of Western Ontario, Department of Economics.
  9. repec:cup:cbooks:9780521319867 is not listed on IDEAS
  10. Atkinson, A. B. & Stiglitz, J. E., 1972. "The structure of indirect taxation and economic efficiency," Journal of Public Economics, Elsevier, vol. 1(1), pages 97-119, April.
  11. Myles, Gareth D., 1989. "Ramsey tax rules for economies with imperfect competition," Journal of Public Economics, Elsevier, vol. 38(1), pages 95-115, February.
  12. Dixit, Avinash K, 1970. "On the Optimum Structure of Commodity Taxes," American Economic Review, American Economic Association, vol. 60(3), pages 295-301, June.
  13. Harris, Richard G. & Mackinnon, James G., 1979. "Computing optimal tax equilibria," Journal of Public Economics, Elsevier, vol. 11(2), pages 197-212, March.
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