Developing country tax replacement in trade liberalization

1. Developing country tax replacement in trade liberalization Christian A. EminiTorbjörn G. Jansson

2. Motivation • Tariff revenues important for nat. budget • Enforcing… requires • QUESTION: Which tax to choose for VarTax? • Options: Income tax vs. Consumption tax

3. Experimental design Closure: Choice of replacement tax Income tax Consumption tax Unilaterally for RICH:Output taxInput subsidies Multilaterally remove: Import tariffs Export subsidies PovRich0 PovRich1 Shock

4. Main results • Differential poverty effect of reform • Income tax is GENERALLY* better • Why? * Not in Vietnam, but the difference is very small there

5. GE-effect of tax choice • Income tax influences allocation less • Income tax is more efficient • Utility generally higher with Income tax replacement • Utility increases in all regions with income tax • Then why was there no general poverty reduction?

6. Welfare vs. Poverty Analysis • General opinion: Welfare and poverty vary in opposite directions • But it could be misleading to limit analysis only to welfare impacts: • A raise in welfare could lead in poverty worsening! • A fall in welfare could lead in poverty alleviation! ? ?

7. Welfare vs. Poverty Analysis

8. Welfare vs. Poverty Analysis Drivers of the poverty impacts • Initial distribution around the poverty line • The initial poverty gap (intensity of poverty) • The pattern of consumption shares: with regard to change in prices of most consumed products • Sources of income shares: with regard to change in factor returns • The pattern of initial distortions and the nature of the replacement tax or shock

9. Concluding Remarks • More efficiency is good for Welfare (and GDP) improvement • But it is not automatically pro-poor • This non triviality verified through tax replacement experiments justifies per se the importance to set a genuine poverty module within the model

10. Thank You !