Question

In the Trade Talks: When is Tariff Revenue Bad Tax Revenue? excerpts we discussed in class, Dr. Lucie Gadenne discussed the differences between rich and poor countries in regard to tariff use and revenue. Explain how the two types of countries differ in their use and reliance on tariffs. Then explain the recommendation they make for poor countries that would like to open up to free trade. Simplify in 2 sentences.

Answer 1

Tariffs are mainly tax on imported goods and services. It is charged by the importing country on the goods imported. It is one of the source of public revenue for any government. Tariff can lead to bad tax when any government increases tariff rate and try to make it as real source of revenue.

High tariff increases cost of imported goods and inflation as the importers generally pass this cost to the customers. Lower income and middle income will get affected due to this inflation. Moreover, due to the less competitive pressure producers neither imporve or innovate their products. Instead they increase the price of the products. Another bad effect of high tariff is that the trade partners will also get affected. They will retaliate and reduce or curtail the exports of the country. In this angle heavy dependency on tariff makes it a bad tax revenue.

Dr Lucie Gadenne has conducted a remarkable research in tariff tax revenue. Her purpose was to know who actually benefit out of taxes and fiscal cost of trade liberalisation.

She says that developed countries ie, rich countries at their initial years heavily depend upon tariff until they develop and overtime they attain capacity to get revenue from domestic income and expenditure. She analysed the trend of different countries. Most of them could cut tariff over the years.she conducted research used 103 developing countries and the research shows only 55 %of the countries recover through other tax resources.

In case of poor countries ie, low and middle income countries, tariff revenue have never come too low over the years as compared to developed countries. They depend both on domestic tax as well tariff revenue.

Their model recommends that gains from trade liberalisation can be obtained by investing tax capacity. Building more efficient tax administration in developing countries may lead to open to trade liberalisation benefits and they no longer need to depend heavily on tariff for revenue.