Coordinated Tax-Tariff Reforms, Informality, and Welfare Distribution

52 Pages Posted: 6 Jul 2010  

Jenny E. Ligthart

Tilburg University - CentER, Department of Economics; University of Groningen - Faculty of Economics and Business; CESifo (Center for Economic Studies and Ifo Institute)

Gerard van der Meijden

Tilburg University - Center and Faculty of Economics and Business Administration

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Date Written: June 30, 2010

Abstract

The paper studies the revenue, efficiency, and distributional implications of a simple strategy of offsetting tariff reductions with increases in destination-based consumption taxes so as to leave consumer prices unchanged. We employ a dynamic micro-founded macroeconomic model of a small open developing economy, which features an informal sector that cannot be taxed, a formal agricultural sector, and an import-substitution sector. The reform strategy increases government revenue, imports, exports, and the informal sector. In contrast to Emran and Stiglitz (2005), who ignore the dynamic effects of taxes and tariffs on factor markets, we find an efficiency gain, which is unevenly distributed. Existing generations benefit more than future generations, who - depending on pre-existing tax and tariff rates and the informal sector size - even may become worse off.

Keywords: tariff reform, consumption tax reform, informal sector, home production, transitional dynamics, overlapping generations, second-best outcome

JEL Classification: E26, F11, F13, H20, H26

Suggested Citation

Ligthart, Jenny E. and Meijden, Gerard van der, Coordinated Tax-Tariff Reforms, Informality, and Welfare Distribution (June 30, 2010). CESifo Working Paper Series No. 3107. Available at SSRN: https://ssrn.com/abstract=1634791

Jenny E. Ligthart (Contact Author)

Tilburg University - CentER, Department of Economics ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands
+31 13 466 8755 (Phone)
+31 13 466 4032 (Fax)

University of Groningen - Faculty of Economics and Business ( email )

Postbus 72
9700 AB Groningen
Netherlands

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Gerard Van der Meijden

Tilburg University - Center and Faculty of Economics and Business Administration ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

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