Coordinating tariff reduction and domestic tax reform

A key obstacle to fundamental tariff reform in many countries is the revenue loss that it ultimately implies. This paper establishes and explores a simple and practicable strategy for realizing the efficiency gains from tariff reform without reducing public revenue, showing that for a small economy a cut in import duties (respectively, export taxes) combined with a point-for-point increase in domestic consumption taxes (production taxes) increases both welfare and public revenue. Increasingly stringent conditions are required, however, to ensure unambiguously beneficial outcomes from this reform strategy when allowance is made for such important features of reality as non-tradeable final goods and tradeable intermediate inputs. (C) 2002 Elsevier Science B.V. All rights reserved.