Revista de Economía y Negocios

Strategic Tax Distortion, Allocative Production Efficiency, and the Optimal Export Trade Policy

Abstract

Horn-In Kuo

Apart from the traditional literature on trade policy, this paper establishes a trade model that includes the home country’s domestic tax system. In the case where the home country manufacturers’ cost structures are heterogeneous, we make several important discoveries. First of all, the home country government can upgrade the home country industry’s allocative production efficiency by strategically distorting the tax system, and thereby achieve the objective of enhancing the home country’s social welfare. Secondly, as long as the market demand curve is not too concave, or the coefficient of variation of the home country manufacturers’ costs is sufficiently low, the tax policy and the export tax trade policy will be substitutes for each other, in the sense that if the corporate tax system is introduced, the optimal export tax rate (subsidy rate) will be reduced (increased). Finally, when the market inverse demand function is convex (linear, concave), the market equilibrium price will decrease (remain constant, increase), after the tax system is introduced.