Trade Taxes Are Expensive

Can Erbil ()

International Trade from EconWPA

Abstract: This paper examines the welfare implications of trade reforms in the presence of a government budget constraint. There is consensus about gains from opening up to trade. The less investigated question is, whether a coordinated tax reform, where the tariff revenue cuts are compensated with increases in distortionary domestic taxes, will still be welfare improving or not. Are trade taxes an expensive tool to raise the necessary revenue for governments? This paper uses a CGE model to generate “Marginal Cost of Funds” (MCF) figures for 32 countries to answer this question. The results suggest that there are significant welfare gains from further trade liberalization, especially for developing countries.

Keywords: Trade Liberalization; Tax Reform; Welfare Gain; Marginal Cost of Funds (MCF); Computable General Equilibrium Model (CGE) (search for similar items in EconPapers)
JEL-codes: F13 F15 H20 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-pbe
Date: Written 2004-09-05
Note: Type of Document - pdf; pages: 30. Appendix is not for publication
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