The Dynamics of Revenue-Neutral Trade Liberalization

CentER Discussion Paper No. 2011-142

47 Pages Posted: 20 Dec 2011

See all articles by Jenny E. Ligthart

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

Date Written: December 20, 2011

Abstract

The paper studies the dynamic welfare and macroeconomic effects of a revenue-neutral strategy of offsetting tariff reductions with increases in destination-based consumption taxes. To this end, we employ a dynamic general equilibrium model of a small open developing economy, featuring endogenous labor supply and sector-specific capital and land. In contrast to conventional results from tax-tariff reform studies based on fixed factor endowments, we find that instantaneous utility and the volume of trade fall on impact. Aggregate output rises in the short run, reflecting increased labor supply and a more efficient allocation of resources across sectors. In the long run, however, aggregate output declines, whereas instantaneous utility and the volume of trade increase compared to the pre-reform equilibrium. For a plausible calibration of the model, lifetime welfare is shown to increase.

Keywords: tariff reform, coordinated tax-tariff reform, consumption tax reform

JEL Classification: F13, F41, H20

Suggested Citation

Ligthart, Jenny E. and Meijden, Gerard van der, The Dynamics of Revenue-Neutral Trade Liberalization (December 20, 2011). CentER Discussion Paper No. 2011-142. Available at SSRN: https://ssrn.com/abstract=1974861 or http://dx.doi.org/10.2139/ssrn.1974861

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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