Rents, Regulation, and Indirect Tax Design

35 Pages Posted: 13 Nov 2007

See all articles by Carlo Perroni

Carlo Perroni

University of Warwick - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

John Whalley

University of Western Ontario - Department of Economics; National Bureau of Economic Research (NBER); CESifo (Center for Economic Studies and Ifo Institute); Centre for International Governance and Innovation (CIGI)

Date Written: May 1993

Abstract

This paper discusses the implications of rents and regulations which support them for the design of indirect taxes such as VATS. Intuition suggests high tax rates on industries or products with rents; but we argue that whether rents are natural (due to fixed factors) or market structure related (monopolistic) makes a large difference. In the latter case, a high tax may induce adverse behavioral changes. We develop a general equilibrium tax model based on Canadian data and which incorporates both types of rent, and we use numerical simulation analysis to explore the implications of different types of rents for the design of indirect taxes. Our results suggest that the ways in which taxes should deviate from uniformity depends crucially on the mechanisms that generate rents. They also imply that a broadly based uniform tax will typically not be the optimal choice for economies where rents represent a significant share of value added, even when preferences are homothetic. Finally, they demonstrate that the presence of rents substantially affects measures of the social costs of indirect taxes, both in total and at the margin, and in both directions depending upon the nature of the rents involved.

Suggested Citation

Perroni, Carlo and Whalley, John, Rents, Regulation, and Indirect Tax Design (May 1993). NBER Working Paper No. w4358. Available at SSRN: https://ssrn.com/abstract=478745

Carlo Perroni (Contact Author)

University of Warwick - Department of Economics ( email )

Coventry CV4 7AL
United Kingdom
44 24 7652 8416 (Phone)
44 24 7652 3032 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

John Whalley

University of Western Ontario - Department of Economics ( email )

London, Ontario N6A 5B8
Canada
519-661-3509, ext. 83509 (Phone)
519-661-3666 (Fax)

HOME PAGE: http://www.ssc.uwo.ca/economics/faculty/

National Bureau of Economic Research (NBER)

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CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

Centre for International Governance and Innovation (CIGI) ( email )

57 Erb Street West
Waterloo, Ontario N2L 6C2
Canada

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