Revenue-enhancing trade liberalization in developing countries

Arijit Mukherjee, M. Emranul Haque

Research output: Contribution to journalArticlepeer-review

Abstract

Recovering revenue loss due to the reduction in import tariffs is a major concern of many developing economies. In an economy with free entry, which affects the product market competition, we show that, even if there is no other tax reform such as a profit tax reform, the market mechanism itself takes care of the loss of government revenue following a tariff reduction if entry is sufficiently costly. A compensatory profit tax to compensate the loss of government revenue following a tariff reduction is required for an intermediate level of entry cost. If the entry cost is very small, the loss of government revenue following a tariff reduction cannot be compensated even with a profit tax reform. Hence, the net effect of a tariff reduction on government revenue therefore depends on how much tariff and tax revenues are created by entry, which is affected by changes in both the tariff rate and the profit tax rate.
Original languageEnglish
Pages (from-to)2275-2281
Number of pages6
JournalEconomics Bulletin
Volume29
Issue number3
Publication statusPublished - 2009

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