Productivity Gaps and Tax Policies Under Asymmetric Trade
CER-ETH – Center of Economic Research at ETH Zurich, Working Paper 16/239
68 Pages Posted: 22 Mar 2016
Date Written: March 17, 2016
Abstract
We build a two-country model of endogenous growth to study the welfare effects of taxes on tradable primary inputs when countries engage in asymmetric trade. We obtain explicit links between persistent gaps in productivity growth and the incentives of resource exporting (importing) countries to subsidize (tax) domestic resource use. The exporters' incentive to subsidize hinges on slower productivity growth and is disconnected from the importers' incentive to tax resource in flows i.e., rent extraction. Moreover, faster productivity growth exacerbates the importers' incentive to tax, beyond the rent-extraction motive. In a strategic tax game, the only equilibrium is of Stackelberg type and features, for a wide range of parameter values, positive exporters' subsidies and positive importers' taxes at the same time. The model predictions concerning the impact of resource taxes on relative income shares are supported by empirical evidence.
Keywords: Productivity Gaps, Endogenous Growth, International Trade, Tax Policy
JEL Classification: O40, F43
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