Tariffs, Optimal Taxes, and Collection Costs

ByDubravko Mihaljek

April 1, 1992

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper studies an optimal tax problem for a small open economy where collecting taxes is costly. It is shown that, in the presence of collection costs modeled as an increasing function of the tax rate: (a) the standard rules of optimal commodity taxation (the Ramsey, the inverse elasticity, the Corlett-Hague rules) may no longer be valid; (b) tariffs may replace domestic taxes as a second-best revenue-raising device; and (c) the optimal tariff/tax structure may be uniform rather than differentiated.

Subject: Consumption taxes, Demand elasticity, Economic theory, Optimal taxation, Tariffs, Tax policy, Taxes, Taxes on trade

Keywords: collection cost, consumer demand, Consumption taxes, Demand elasticity, excess demand, open economy, Optimal taxation, public goods, tariff structure, Tariffs, tax rate, Taxes on trade, trade tax, utility function, WP

Pages:
34
Volume:
1992
DOI:
https://doi.org/10.5089/9781451844573.001
Issue:
028
Series:
Working Paper No. 1992/028
Stock No:
WPIEA0281992
ISBN:
9781451844573
ISSN:
1018-5941

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