Panos Hatzipanayotou

Win-win indirect tax reform: A modest proposal

Abstract The literature on tariffs and that on commodity taxes have established sufficient conditions under which tariff or commodity tax reform improves welfare. Since less developed countries need to raise certain revenue from indirect taxation, we consider a policy reform within the complete indirect tax structure (i.e. an increase in consumption taxes combined with a decrease in tariffs) that improves welfare and raises government revenue. We demonstrate that when uniform reductions in trade taxes accompany offsetting increases in consumption taxes, so that consumer prices remain constant, welfare improves and government revenue increases if the initial position provides a net subsidy to producers.

Can Cross-border Pollution Reduce Pollution?

We develop a North-South model of foreign aid and cross-border pollution resulting from production activities in the recipient country. There is both private and public abatement of pollution, the latter being financed through emissions tax revenue and foreign aid. We characterise a Nash equilibrium where the donor country chooses the amount of aid, and the recipient chooses the fraction of aid allocated to pollution abatement and/or the emission tax rate. At this equilibrium, an increase in the donors perceived rate of cross-border pollution reduces net emission levels.

Foreign aid and public goods

Abstract Most less-developed countries (LDCs) use foreign economic aid to finance public consumption goods, or public intermediate inputs. This paper constructs a two-country general equilibrium trade model, where an income transfer that takes place between the two countries is used by the recipient to finance a public consumption good. Within this framework, the paper identifies the conditions under which the income transfer improves or deteriorates the donor countrys terms of trade, and shows that the transfer can be welfare enriching for the donor, and welfare immiserizing for the recipient country. The paper also demonstrates that the transfer can raise (reduce) world welfare, in which case a welfare increase (decrease) in both the donor and the recipient country is possible.

Real Exchange Rate Effects of Fiscal Expansion under Trade Restrictions

We develop a small open-economy trade model where either a tariff, or a quota, or a voluntary export restraint (VER) exists, and where one exported, one imported, one non-traded, and one public good are produced. Within this context we examine the effects of fiscal expansion on welfare and the real exchange rate (RER). Among other things, it is demonstrated that when the direct social profitability effect of the public good is positive and the public good is a net complement to the non-traded good, fiscal expansion causes an appreciation of the RER under free trade, and under a tariff when the public good is also a net complement to the imported good. The paper identifies additional conditions required to ensure the appreciation of the RER, due to fiscal expansion, under an import quota or a VER.

General Equilibrium Effects of Import Constraints under Variable Labour Supply, Public Goods and Income Taxation

We consider a general equilibrium trade model of a small open economy with a representative consumer, where labour supply is variable, where imports are restricted by a small tariff, a quota or a voluntary export restraint (VER), and where alongside the production of two traded goods one imported and one exported a pure public good is produced and funded through an income tax. Within this framework, we demonstrate, among other things, that under certain conditions, while a small tariff or quota reduces employment and welfare, a VER may increase them. Thus, in the context of a small open economy, contrary to standard results, in certain cases VERs may become the welfare- and employment-dominant instrument over the alternative import restrictions. Copyright 1999 by The London School of Economics and Political Science

Welfare Effects Of Migration In Societies With Indirect Taxes, Income Transfers And Public Good Provision

We construct a general equilibrium trade model of a two-class small open host or source country. When consumption tax revenue finances the provision of a public good, marginal migration reduces social welfare in the source country and raises it in the host. When consumption tax revenue is equally distributed among domestic households in each country, then migration has an ambiguous impact on social welfare in either country. When tariff revenue in either country is either equally distributed among domestic households, or it is used to finance the provision of a public good, then migration has an ambiguous effect on social welfare in the host country, and is expected to reduce social welfare in the source.

Public Goods, Tax Policies, and Unemployment in LDCs

We build a general equilibrium model of a small open economy characterized by unemployment and producing two privately traded goods and one nontraded public consumption good. The provision of public good is financed with an income tax or an excise tax on the manufactured good or an import tariff. Within this framework, the paper examines the effects of such policies on the countrys unemployment ratio and welfare, and it derives the efficiency rules for public good provision for each policy instrument. It shows, among other things, that the private marginal cost of the public good always overstates its social marginal cost in the case of income taxes and may overstate it in the case of an excise tax on the manufactured good or a tariff even if the taxed good and the public good are substitutes in consumption.

Pollution, Capital Mobility and Tax Policies with Unemployment

In this paper we highlight aspects related to the links among unemployment, international capital mobility, and tax policies in a small open developing economy. Without international capital mobility, the joint optimal trade and environmental policies require a zero tariff and an emission tax lower than the Pigouvian tax. With international capital mobility and a capital tax (subsidy), the optimal emission tax rate is smaller (larger) compared to the rate when capital is untaxed. When both the emission tax and the capital tax/subsidy are jointly chosen optimally, then the optimal policy on capital is a lower subsidy, or even a tax, compared to the standard capital subsidy of the no pollution case.

Tariffs, quotas, and voluntary export restraints with endogenous labor supply

This paper develops a two-good, small-country, general equilibrium trade model with endogenous labor supply and wage taxes, and where trade is restricted by a tariff, or an import quota, or VERs. Within this framework we derive (i) the employment and welfare effects of the three types of trade restrictions, (ii) the price effect of an import quota and VERs, and (iii) the shadow price of foreign exchange under each type of trade restriction. The present results are compared to those where (i) factor supplies are fixed, and (ii) perfect international capital mobility exists.

Environmental Policy Reforms in a Small Open Economy with Public and Private Abatement

We construct a competitive general equilibrium model for a small open economy, which suffers from domestically production-generated pollution and as well as by cross-border pollution. Private producers and the country’s public sector sequentially undertake pollution abatement. We characterise the optimal levels of two policy instruments, viz. an emissions tax and funds allocated for public abatement activities, and examine how cross-border pollution affects these levels. We also establish necessary and/or sufficient conditions under which several comprehensive and partial reforms of the policy instruments, starting from arbitrary initial levels, raise welfare and/or lower the level of net pollution emissions.