Chapter 6 Tax policy in open economies

Abstract

Publisher Summary This chapter discusses tax policy in open economies. The chapter discusses the theory of optimum taxation in an economy open to international trade. Most formal models of optimum taxation assume away international trade. Its presence does not alter any basic issues or methods. The economic objectives of the policy remain the same, and can be broadly classified as (i) correcting externalities and distortions, (ii) raising revenue for government expenditure, and (iii) redistributing income. There may also be other “non-economic” objectives or constraints. The policy instruments to pursue these aims are taxes or subsidies on the activities and transactions in the economy, within limitations imposed by observability of the actions and enforceability of the policies. International trade introduces a new set of possible externalities and distortions, and a new set of transactions to tax or subsidize.