Integrated reforms of tariffs and consumption taxes

Abstract

The literatures on tariffs and commodity taxes have independently established sufficient conditions under which a tariff or commodity tax reform improves welfare. The present paper considers policy reforms within an integrated indirect tax structure. Given the relative inefficiency of tariffs to consumption taxes, given the existing high tariffs in less-developed countries (LDCs), and given the LDCs' need to raise certain revenue from indirect taxation, we identify conditions under which decreasing tariffs and increasing consumption tax rates improve welfare while government revenue remains constant. We also examine with and without the constant revenue constraint the conditions under which the movement of the total tax burden rates toward uniformity, through adjustments in consumption tax and tariff rates, improves welfare. © 1993.