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2022 | OriginalPaper | Chapter

Trade Liberalization and Profit Tax Reform Under Oligopolistic Vertical Trade

Authors : Masayuki Okawa, Tatsuya Iguchi

Published in: International Trade, Economic Development, and the Vietnamese Economy

Publisher: Springer Nature Singapore

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Abstract

This chapter studies the welfare effects of trade liberalization and the accompanied domestic profit tax reform in a vertical trading economy where oligopoly firms in a domestic final good market import intermediate good from a foreign monopolist and compete in either a Cournot or a Bertrand fashion. We show that if the initial protection level is relatively high, governments can ensure higher welfare for consumers and producers by raising profit taxes compensating for a decrease in a government’s revenue caused by a reduction of the tariff on the intermediate good. When the import tariff is already at a low level, the government may not be able to meet that policy goal.

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previous chapter Efficiency-Inducing Tax Credits for Charitable Donations when Taxpayers Have Heterogeneous Behavioral Norms
next chapter Properties of the Production Possibility Frontier of Generalized Ricardian Economy with a Pure Public Intermediate Good
Footnotes
1
We normalize the marginal utility of the numeraire good to unity.
 
2
The level of the profit tax that maximizes the total revenue is infinitely close to 1. But we suppose that the role of the profit tax for the government is to make up the shortfall of the government revenue caused by the reduction of input tariff in order to keep the government revenue unchanged.
 
3
The SOC is satisfied: ∂ 2 R C/(∂t)2 =  − (n/2){2[2 + θ(n − 1)] − T}[2 + θ(n − 1)]−2 < 0.
 
4
Hackner (2000) pointed out that when goods are complements and quality differences are large, low-quality firms charge higher prices under a Bertrand competition than a Cournot competition. In our setting, however, final goods are horizontally differentiated only and substitutes.
 
Literature
Hackner, J. (2000). A note on price and quality competition in differentiated oligopolies. Journal of Economic Theory, 93(2), 233–239.CrossRef
Haque, M. E., & Mukherjee, A. (2005). On the revenue implications of trade liberalization under imperfect competition. Economics Letters, 88(1), 27–31.CrossRef
Hatzipanayatou, P., Michael, M. S., & Miller, S. M. (1994). Win-win indirect tax reform. Economics Letters, 44(1–2), 147–151.CrossRef
Keen, M., & Ligthart, J. E. (2002). Coordinating tariff reduction and domestic tax reform. Journal of International Economics, 56(2), 489–507.CrossRef
Keen, M., & Ligthart, J. E. (2005). Coordinating tariff reduction and domestic tax reform under imperfect competition. Review of International Economics, 13(2), 385–390.CrossRef
Mujumdar, S. (2004). Revenue implications of trade liberalization under imperfect competition. Economics Letters, 82(1), 83–89.CrossRef
Naito, T., & Abe, K. (2008). Welfare-and revenue-enhancing tariff and tax reform under imperfect competition. Journal of Public Economic Theory, 10(6), 1085–1094.CrossRef
Okawa, M., & Iguchi, T. (2016). Welfare-improving coordinated tariff and sales tax reforms under imperfect competition. Review of Development Economics, 20(2), 475–487.CrossRef
Okawa, M., & Iguchi, T. (2018). Welfare effects of trade liberalization and coordinated domestic sales tax reform under international oligopoly. In T.-N. Binh, M. Tawada, & M. Okawa (Eds.), Recent development in normative trade theory and welfare economics (pp. 43–62). Springer.CrossRef
Vives, X. (1985). On the efficiency of Bertrand and Cournot equilibria with product differentiation. Journal of Economic Theory, 36(1), 166–175.CrossRef
Metadata
Title
Trade Liberalization and Profit Tax Reform Under Oligopolistic Vertical Trade
Authors
Masayuki Okawa
Tatsuya Iguchi
Copyright Year
2022
Publisher
Springer Nature Singapore
Book
International Trade, Economic Development, and the Vietnamese Economy

Print ISBN: 978-981-19-0514-8

Electronic ISBN: 978-981-19-0515-5

Copyright Year: 2022

DOI
https://doi.org/10.1007/978-981-19-0515-5_3