Tax-subsidy Scheme Research Articles

The Comparative Efficiency of Tariffs and Other Tax-Subsidy Schemes as a Means of Obtaining Revenue or Protecting Domestic Production

T HE applications of second-best welfare theory usually relate to a single policy issue such as whether the imposition of tariffs will increase welfare in the presence of distortions in domestic factor markets or whether a general direct tax is more efficient than an indirect tax on a specific commodity. The aim of this article is to extend our knowledge about the comparative efficiency of different tax systems by calculating the excess burden of several taxes (subsidies), all of which accomplish a specific policy objective such as raising a given amount of revenue or increasing the output of a particular commodity by a predetermined amount. Although this paper is abstract and fairly general, it was stimulated by a number of specific tax policy issues related to underdeveloped economies. One of these issues arises from the commitment of many underdeveloped countries to industrialization policies that involve the granting of subsidies to the industrial import-competing sectors. Since taxes on foreign trade have often been advocated as a form of subsidy, it is important to see how taxes on imports and exports compare in efficiency with other taxes and subsidies that have the same expan-