WIN-WIN INDIRECT TAX-REFORM - A MODEST PROPOSAL

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.