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A Theory of Optimal Tariffs under a Revenue Constraint

Author

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  • Tatsuo Hatta

    (CIRJE, Faculty of Economics, University of Tokyo)

  • Yoshitomo Ogawa

    (School of Business and Economics, Kinki University)

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 theoretically explains why empirical studies have shown that the efficiency loss from a uniform tariff structure is negligible.

Suggested Citation

  • Tatsuo Hatta & Yoshitomo Ogawa, 2003. "A Theory of Optimal Tariffs under a Revenue Constraint," CIRJE F-Series CIRJE-F-202, CIRJE, Faculty of Economics, University of Tokyo.
    • Handle: RePEc:tky:fseres:2003cf202
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    File URL: http://www.cirje.e.u-tokyo.ac.jp/research/dp/2003/2003cf202.pdf
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    References listed on IDEAS

    as
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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. MUNK Knud, 2010. "Administrative Costs and Optimal Diversions from Free Trade in a Small Open Economy," EcoMod2003 330700108, EcoMod.
    3. Tatsuo Hatta, 2004. "A Theory of Commodity Tax Reform under Revenue Constraint," The Japanese Economic Review, Japanese Economic Association, vol. 55(1), pages 1-16, March.
    4. 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.

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