Abstract
What kinds of tariff reform are likely to raise welfare in situations where tariff revenue is important? General conditions for welfare to rise without reducing tariff revenue are opaque. We show that they can be greatly simplified using a small number of sufficient statistics, primarily the generalized mean and variance of tariffs. We present sufficient conditions for a class of linear tariff reform rules that guarantee higher welfare without a loss in revenue. The rules consist of convex combinations of (i) trade-weighted-average-tariff-preserving cuts in dispersion; and (ii) uniform tariff cuts that preserve domestic relative prices among tariff-ridden goods.
Highlights
What kinds of tariff reform are likely to raise welfare in situations where tariff revenue is important? The question is an important one: despite steady reductions in average tariffs, tariff revenue is still a significant component of total tax revenue, especially in low-income countries. Baunsgaard and Keen (2010) review the empirical evidence on the revenue effects of trade liberalization in recent decades, and conclude that, while middle-income countries have managed to offset reductions in trade tax revenues by increasing their domestic tax revenues, many low-income countries have not
Proposition 3 implies that absolute tariff cuts with constant dispersion decrease revenue, which creates a presumption against average tariff reductions as part of a reform package when tariff revenue is important
The CES expression (31) for the marginal cost of funds reveals that the focus of Propositions 4 and 5 on convex combinations of meanpreserving tariff cuts and dispersion-preserving mean cuts does capture all the relevant characteristics of welfare-improving revenue tariff reform which can be guaranteed without full knowledge of substitution effects
Summary
What kinds of tariff reform are likely to raise welfare in situations where tariff revenue is important? The question is an important one: despite steady reductions in average tariffs, tariff revenue is still a significant component of total tax revenue, especially in low-income countries. Baunsgaard and Keen (2010) review the empirical evidence on the revenue effects of trade liberalization in recent decades, and conclude that, while middle-income countries have managed to offset reductions in trade tax revenues by increasing their domestic tax revenues, many low-income countries have not. Neary / Journal of International Economics 98 (2016) 150–159 assuming that the government has lump-sum tax/transfer power This approach has been extended to study the interplay of revenue and efficiency considerations in trade policy reform by a number of authors, including Falvey (1994), Emran and Stiglitz (2005), Hatta and Ogawa (2007), and Raimondos-Møller and Woodland (2015). That paper derived linear welfare-improving reform rules as implications of reform that reduced either or both of two sufficient statistics, the generalized mean and generalized variance of the tariff structure We extend these methods to the case where lump-sum taxes and transfers are not feasible and so the government faces a binding revenue constraint.
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