Revenue-neutral or profit-neutral tariff and tax reforms under imperfect competition: Welfare implications

Abstract

Concerns over the financial losses of government in revenues resulting from tariff reductions under trade liberalization have triggered many low-income countries to opt for a proper strategy of reforming their domestic consumption taxes. This paper analyzes the welfare effects of two coordinated tariff and tax reform strategies: one is to keep government revenue unaffected, and the other is to leave domestic profit unchanged when there are tariff cuts. Within a stylized framework of international duopoly, we identify conditions under which the tariff and tax reforms (revenue-neutral and profit-neutral) make domestic consumers better off and are welfare improving to a reforming country.