Tax Principles and Tariff-Tax Reforms

This paper develops a two-country general-equilibrium model to examine the welfare effect of tariff-tax reforms that fix the world price. We show that this reform improves welfare if a production tax is adjusted, but that it reduces welfare if a consumption tax is used. Moreover, this result is reversed in the export tax case. In short, the proposed policy reform improves welfare depending on whether imports and exports are taxed, as well as on tax principles.