Can tariff and tax reforms deliver welfare improvements under imperfect competition?

Καρακώστα, Ουράνια; Tsakiris, Nikos

doi:10.1080/09638199.2012.717103

Cited by 10 publications

(3 citation statements)

References 12 publications

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“…We hypothesize that tax reform could have an effect on the real exchange rate through the trade openness channel. However, before laying out the arguments supporting the effect of the tax reform through the trade openness channel, it is important to note that tax reform (particularly a revenue-neutral tariff-tax reform) could also have an effect on the real exchange through other channels, 3) such as the domestic output (e.g., Ganelli and Tervala, 2015;Michael et al, 1993;Ligthart, 2002, 2005;Karakosta and Tsakiris, 2014;Kreickemeier and Raimondos-Møller, 2008;Naito, 2006), which include the Keynesian expenditure-switching effect of a nominal exchange rate change when prices are stagnant (Ganelli and Tervala, 2015). Then, we discussed how the effect of tax reform on the real exchange rate could materialize through this channel.…”

Section: Theoretical Discussion On the Effect Of Tax Reform On The Re...mentioning

confidence: 99%

Effects of the Tax Transition Reform on the Real Exchange Rate through the Trade Openness Channel in Developing Countries

Gnangnon¹

2023

Journal of Economic Integration

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International financial institutions have advised developing countries to implement a reform of their tax revenue structure to reduce their dependence on international trade tax revenue, for the benefit of domestic tax revenue. This study examines the effect of this type of tax reform on the real exchange rate through the trade openness channel. It defines tax reform (also known as "tax transition reform") as a process that involves the convergence of developing countries' tax structures toward the tax structure of developed countries (given the weak dependence of the latter's tax structure on international trade tax revenue). The analysis is conducted using an unbalanced panel dataset of 107 countries from 1980-2019, and the two-step system-generalized method of moments approach. The findings show that tax reform causes real exchange rate depreciation, with the magnitude of this effect being higher in developed countries than in developing countries. Furthermore, the real exchange rate depreciation effect of the tax reform is higher in countries with greater trade openness and a tax structure that is less dependent on international trade tax revenue.

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Section: Theoretical Discussion On the Effect Of Tax Reform On The Re...mentioning

confidence: 99%

Effects of the Tax Transition Reform on the Real Exchange Rate through the Trade Openness Channel in Developing Countries

Gnangnon¹

2023

Journal of Economic Integration

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“…Thus, a reduction of implicit production subsidies (due to declining tariffs) would allow efficient allocation of resources in the production sector, generate welfare gains, and also increase public revenue. The literature on the tariff-tax reform has usually investigated the effect of tariff-tax reform on market access, public revenue, and welfare (e.g., Fujiwara 2013, Hatzipanayotou et al 1994, Keen and Ligthart 2002, Kreickemeier and Raimondos-Møller 2008, Karakosta and Tsakiris 2014. Specifically, the literature on the effect of tariff-tax reform on market access (defined as the value of import volumes at the world price) has usually focused on one specific tariff-tax reform that involves a one-unit tariff reduction and an increase in consumption tax by one unit, as advised by international financial institutions.…”

Section: Introductionmentioning

confidence: 99%

Tax Reform and Trade Openness in Developing Countries

Gnangnon

2019

Journal of Economic Integration

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Developing countries are confronted with the progressive erosion of their trade tax revenue, which then reduces their total tax revenue. In light of the unavoidable process of trade liberalization, such countries have engaged in tax transition reform to change their tax revenue structure in favor of domestic tax revenue. The current analysis uses a measure of tax transition reform (tax reform) to examine whether countries that engage in tax reform experience greater trade openness. The empirical analysis covers 92 developing countries from 1980 to 2014 and shows that tax reform is positively associated with trade openness. Interestingly, least developed countries (LDCs) appear to enjoy a higher effect of tax reform on trade openness than non-LDCs do. This is confirmed by a more general picture that shows how less advanced developing countries enjoy a higher positive effect of tax reform on trade openness than relatively advanced developing countries do.

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“…These studies have focused on perfectly competitive product markets and have shown that a tariff reduction, combined with an increase in consumption taxes, improves welfare and government revenue. However, under imperfect competition, although there are a few cases where the same tariff–tax reforms improve welfare (Naito and Abe, ; Karakosta and Tsakiris, ), the compensation of government revenue losses under these reforms usually comes at the cost of national welfare (Keen and Ligthart, ). Such welfare‐reducing tariff–tax reforms under imperfect competition give rise to doubts about their applicability as a policy and raise the following questions: (1) Does a tariff reduction with no other tax reform, such as a consumption tax, inevitably lead to loss in government revenue under imperfect competition?…”

Section: Introductionmentioning

confidence: 99%

Revenue‐enhancing Trade Liberalization in a Differentiated Duopoly

Shim

Jeong

2016

Review Development Economics

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Existing studies suggest that in developing countries, tax reforms that increase consumption taxes can compensate for shortfalls in revenue from a tariff reduction. However, these revenue-enhancing tariff-tax reforms have a critical shortcoming-they generally reduce welfare under imperfect competition. This paper shows that tax reforms such as consumption tax reforms do not necessarily have to be implemented to make up for revenue shortfalls from tariff reductions under imperfect competition, because trade liberalization through tariff cuts leads to an increase in government revenue when domestic and imported goods have a high substitutability. This revenue-enhancing effect of a tariff reduction occurs for a wider degree of product substitutability when initial tariff and consumption tax rates are high. More importantly, we show that even if initial tariff and consumption tax rates are sufficiently low, a tariff reduction still increases government revenue for a low degree of product differentiation under Bertrand competition.

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Can tariff and tax reforms deliver welfare improvements under imperfect competition?

Cited by 10 publications

References 12 publications

Effects of the Tax Transition Reform on the Real Exchange Rate through the Trade Openness Channel in Developing Countries

Effects of the Tax Transition Reform on the Real Exchange Rate through the Trade Openness Channel in Developing Countries

Tax Reform and Trade Openness in Developing Countries

Revenue‐enhancing Trade Liberalization in a Differentiated Duopoly

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