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Optimal Tariffs under a Revenue Constraint

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  • Tatsuo Hatta
  • Yoshitomo Ogawa

Abstract

This paper examines the optimal tariff structure under a revenue constraint. When a fixed level of tax revenue has to be collected from the tariff alone, no adjustment in tariff rates can achieve an efficient resource allocation, even in a small open economy. Hence, the optimal tariff problem arises under a revenue constraint. We show that the revenue‐constrained optimal tariff structure is characterized by the following two rules: (i) the optimal tariff rate is lower for the import good that is a closer substitute for the export good, and (ii) the stronger the cross‐substitutability between imports, the closer the optimal tariff is to uniformity. This provides a theoretical explanation for the finding in empirical studies that the efficiency loss from a uniform tariff structure is negligible.

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  • Tatsuo Hatta & Yoshitomo Ogawa, 2007. "Optimal Tariffs under a Revenue Constraint," Review of International Economics, Wiley Blackwell, vol. 15(3), pages 560-573, August.
    • Handle: RePEc:bla:reviec:v:15:y:2007:i:3:p:560-573
    DOI: 10.1111/j.1467-9396.2007.00675.x
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    Cited by:

    1. Knud Munk, 2008. "Tax-tariff reform with costs of tax administration," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 15(6), pages 647-667, December.
    2. Anderson, James E. & Neary, J. Peter, 2016. "Sufficient statistics for tariff reform when revenue matters," Journal of International Economics, Elsevier, vol. 98(C), pages 150-159.
    3. James E. Anderson & J. Peter Neary, 2013. "Revenue Tariff Reform," NBER Working Papers 19752, National Bureau of Economic Research, Inc.
    4. Yoshitomo Ogawa & Nobuhiro Hosoe, 2018. "Optimal Indirect Tax Design for a Developing Country," GRIPS Discussion Papers 18-06, National Graduate Institute for Policy Studies.
    5. Yoshitomo Ogawa, 2009. "The Welfare Effects of Differential Tariff Rates," Review of Development Economics, Wiley Blackwell, vol. 13(2), pages 348-355, May.
    6. Knud MUNK, 2008. "On the Use of Border Taxes in Developing Countries," EcoMod2008 23800093, EcoMod.
    7. Yoshitomo Ogawa & Nobuhiro Hosoe, 2020. "Optimal indirect tax design in an open economy," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 27(5), pages 1081-1107, October.
    8. Knud Jørgen Munk & Bo Sandemann Rasmussen, 2005. "On the Determinants of Optimal Border Taxes for a Small Open Economy," Economics Working Papers 2005-22, Department of Economics and Business Economics, Aarhus University.
    9. Tatsuo Hatta, 2018. "Revenue-Constrained Combination of an Optimal Tariff and Duty Drawback," Frontiers of Economics in China-Selected Publications from Chinese Universities, Higher Education Press, vol. 13(1), pages 52-67, March.

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