A Theory of Optimal Tariffs under a Revenue Constraint

Tatsuo Hatta and Yoshitomo Ogawa

No CIRJE-F-202, CIRJE F-Series from CIRJE, Faculty of Economics, University of Tokyo

Abstract: This paper examines the optimal tariff structure under a revenue constraint. When a fixed level of tax revenue has to be collected from the tariff alone, no adjustment in tariff rates can achieve an efficient resource allocation, even in a small open economy. Hence, the optimal tariff problem arises under a revenue constraint. We show that the revenue-constrained optimal tariff structure is characterized by the following two rules: (i) the optimal tariff rate is lower for the import good that is a closer substitute for the export good; and (ii) the stronger the cross-substitutability between imports, the closer the optimal tariff is to uniformity. This theoretically explains why empirical studies have shown that the efficiency loss from a uniform tariff structure is negligible.

Pages: 27 pages
Date: 2003-03
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Citations: View citations in EconPapers (7)

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