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 RICHOutput 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!

Income tax as replacement tax Income tax as replacement tax Consumption tax as replacement tax Consumption tax as replacement tax
Change in welfare Change in number of poor Change in welfare Change in number of poor
1 Thailand 1.758 -0.099 0.800 -0.087
2 Vietnam 0.303 -0.013 0.280 -0.017
3 Mozambique 0.843 -0.026 -0.100 -0.006
4 Mexico 0.076 0.019 0.080 0.024
5 Brazil 1.059 0.020 0.910 0.047
6 Malawi 4.649 0.006 4.470 0.011
?
?
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 !