Tariffs and Production Subsidies as Devices to Relax the Incentive Problem of a Progressive Income Tax System

Hisahiro Naito

Working Papers from Research Seminar in International Economics, University of Michigan

Abstract: This paper shows that tariffs and production subsidies can Pareto-improve welfare in a small open economy when a government is concerned with income redistribution under asymmetric information. In international trade theory, free trade is optimal if the government can use lump-sum taxes and transfers. However, in reality the government cannot use the lump-sum taxes and trabsfers due to asymmetric information between the government and individuals. In this case the government needs to use a progressive incomem tax system for income redistribution. This paper shows that in such a situation even if the goverment use Pareto-optimal progressive income tax system used free trade, tariffs can Pareto-improve welfare.

Keywords: TARIFFS; PRODUCTION; INFORMATION (search for similar items in EconPapers)
JEL-codes: F10 F14 H20 H21 (search for similar items in EconPapers)
Pages: 36 pages
Date: 1996
References: Add references at CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:mie:wpaper:391

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