The Costs of Restrictive Trade Policies in the Presence of Factor Tax Distortions
29 Pages Posted: 15 Mar 2001
There are 2 versions of this paper
The Costs of Restrictive Trade Policies in the Presence of Factor Tax Distortions
Date Written: October 1999
Abstract
This paper uses a numerical general equilibrium model to examine the quantitative importance of pre-existing factor tax distortions for the welfare effects of tariffs and import quotas. The presence of pre-existing taxes can greatly raise the costs of these policies, possibly by over several hundred percent. For a tariff much of this extra cost can be offset if tariff revenues are used to reduce distortionary taxes. Hence there can be a large cost discrepancy between tariffs and quotas. The optimal tariff for a country with market power in trade can be reduced to zero, unless revenues finance cuts in distortionary taxes.
Keywords: Pre-existing tax distortions, tariffs, import quotas, welfare costs
JEL Classification: F10, H21
Suggested Citation: Suggested Citation
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