REVENUE-NEUTRAL TARIFF REFORM: THEORY AND AN APPLICATION TO CAMEROON

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  • Revenue-Neutral Tariff Reform Theory an

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This paper addresses the issue of revenue constrained partial tariff reform. We derive instructive formulae clarifying the optimal structure of revenue raising tariffs. We demonstrate the importance of net import demand elasticities and complementarity with untaxed export goods. We further analyze the empirically important case of revenue raising tariffs in the presence of distortionary producer taxes. These are shown to modify the optimal tariff structure in an intuitive manner. We then conduct numerical experiments with an eleven sector general equilibrium model of Cameroon. We calculate optimal revenue constrained tariffs and compare them with the uniform rate that generates the same revenue. In addition, we calculate the social cost of changing individual tariff rates. Our major conclusion is that replacing the existing tariff structure with a uniform rate can lead to significant welfare losses as long as the other taxes in the economy remain suboptimal. If, however, the rest of the taxes are set optimally, then a uniform tariff rate is very close to the optimum, even in a revenue-constrained economy. We also find that changes in individual tariff rates can have very different implications for social welfare-in sign as well as in magnitude-when compared to complete tariff reform.

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