Coordinating Tariff Reduction and Domestic Tax Reform

IMF Working Papers, July 1, 1999

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Coordinating Tariff Reduction and Domestic Tax Reform

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Bibliographic details

• Authors: Michael Keen, Jenny E Ligthart
• Published: July 1, 1999
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781451851632.001

Summary and central proposition

• A key obstacle to fundamental tariff reform in many developing countries is the revenue loss that it ultimately implies.
• For a small open economy, a cut in tariffs combined with a point-for-point increase in domestic consumption taxes increases both welfare and public revenues.
• When important features are introduced—nontradeable goods, intermediate inputs, and imperfect competition— increasingly stringent conditions are required to ensure unambiguously beneficial outcomes from this reform strategy.

Main findings

• Tariff cuts paired with one-for-one increases in domestic consumption taxes can:
  • Increase welfare.
  • Increase public revenues.
• The robustness of the above result weakens as the model incorporates:
  • Nontradeable goods.
  • Intermediate inputs.
  • Imperfect competition.

Policy implications and reform strategy

• A practicable strategy exists for realizing efficiency gains from tariff reform without reducing public revenues by coordinating tariff cuts with equivalent increases in domestic consumption taxes.
• Policy design must account for structural features of the economy (nontradeables, intermediate goods, market structure) because these features tighten the conditions under which the coordinated reform is unambiguously beneficial.
• Reformers should assess whether the specific economy satisfies the required conditions before relying on point-for-point tariff-to-consumption-tax swaps to preserve revenue and improve welfare.

Subject areas and keywords (as provided)

• Subject: Consumer prices, Consumption, Consumption taxes, National accounts, Prices, Producer prices, Tariffs, Taxes
• Keywords: Africa, Consumer prices, Consumption, Consumption taxes, imperfect competition, intermediate inputs, Producer prices, production efficiency, reducing tariff, reform design, reform literature, reform of the kind, revenue function, tariff reduction, tariff reform, tariff revenue, Tariffs, tax reform, tax-tariff reform, WP

Publication metadata and key statistics (as provided)

• Authors: Michael Keen, Jenny E Ligthart
• Date: July 1, 1999
• Series: Working Paper No. 1999/093
• Issue: 093
• Volume: 1999
• Pages: 20
• DOI: https://doi.org/10.5089/9781451851632.001
• ISBN: 9781451851632
• ISSN: 1018-5941
• Stock No: WPIEA0931999

Coordinating Tariff Reduction and Domestic Tax Reform — IMF Working Papers (Michael Keen, Jenny E Ligthart, July 1, 1999).

Content in this bundle

• Coordinating Tariff Reduction and Domestic Tax Reform - WP/99/93
  • Coordinating Tariff Reduction and Domestic Tax Reform - WP/99/93 (Markdown version)
  • Coordinating Tariff Reduction and Domestic Tax Reform - WP/99/93 (PDF)