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How should tariffs be structured?

  • Panagariya, Arvind

In the course of trade-policy reforms, countries must confront at least two important questions with respect to tariffs. First, what is the optimal structure of tariffs? In particular, is it optimal to tax all imports at a uniform rate? Second, should intermediate inputs be subject to import duties and if so is there a role for duty drawbacks on exports? This paper seeks to answer these important questions based on intuitive arguments, supported by literature and simple diagrams. The author argues that the introduction of tariffs on intermediate inputs complemented by duty drawbacks is welfare-improving. He further argues that if the objective is to protect the import-competing sector, uniform tariffs will minimize the distortion in production but not in consumption. If the objective is revenue, uniform tariffs will in general fail to minimize distortion in either production or consumption. The existence of smuggling, imperfect competition, and economies of scale weaken the case for uniform tariffs. The principal justification for uniform tariffs is their transparency, administrative simplicity, and relatively low level of unproductive profit-seeking activities. The author concludes that considerations of efficiency conflict with considerations of political economy. Ultimately the issue calls for more systematic empirical study.

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 353.

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Date of creation: 28 Feb 1990
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Handle: RePEc:wbk:wbrwps:353
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  1. Peter A. Diamond & J. A. Mirrlees, 1968. "Optimal Taxation and Public Production," Working papers 22, Massachusetts Institute of Technology (MIT), Department of Economics.
  2. Robin Boadway & Shlomo Maital & Martin Prachowny, 1973. "Optimal Tariffs, Optimal Taxes and Public Goods," Working Papers 120, Queen's University, Department of Economics.
  3. Tan, Augustine H H, 1971. "Optimal Trade Policies and Non-economic Objectives in Models Involving Imported Materials, Inter-Industry Flows and Non-traded Goods," Review of Economic Studies, Wiley Blackwell, vol. 38(113), pages 105-111, January.
  4. Balassa, Bela, 1989. "Tariff policy and taxation in developing countries," Policy Research Working Paper Series 281, The World Bank.
  5. Arvind Panagariya, 1980. "Import Targets and the Equivalence of Optimal Tariff- and Quota-Structures," Canadian Journal of Economics, Canadian Economics Association, vol. 13(4), pages 711-15, November.
  6. Bruno, Michael, 1972. "Market Distortions and Gradual Reform," Review of Economic Studies, Wiley Blackwell, vol. 39(3), pages 373-83, July.
  7. Fukushima, Takashi, 1979. "Tariff Structure, Nontraded Goods and Theory of Piecemeal Policy Recommendations," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 20(2), pages 427-35, June.
  8. V. K. Ramaswami & T. N. Srinivasan, 1968. "Optimal Subsidies and Taxes When Some Factors Are Traded," Journal of Political Economy, University of Chicago Press, vol. 76, pages 569.
  9. Bertrand, Trent J & Vanek, Jaroslav, 1971. "The Theory of Tariffs, Taxes, and Subsidies: Some Aspects of the Second Best," American Economic Review, American Economic Association, vol. 61(5), pages 925-31, December.
  10. Panagariya, Arvind, 1983. "Import Objective, Distortions, and Optimal Tax Structure: A Generalization," The Quarterly Journal of Economics, MIT Press, vol. 98(3), pages 515-24, August.
  11. Lloyd, P. J., 1974. "A more general theory of price distortions in open economies," Journal of International Economics, Elsevier, vol. 4(4), pages 365-386, November.
  12. Heady, Christopher J. & Mitra, Pradeep K., 1987. "Distributional and revenue raising arguments for tariffs," Journal of Development Economics, Elsevier, vol. 26(1), pages 77-101, June.
  13. Smith, Alasdair, 1980. "Optimal Public Policy in Open Economies," The Warwick Economics Research Paper Series (TWERPS) 176, University of Warwick, Department of Economics.
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