WIN-WIN INDIRECT TAX-REFORM - A MODEST PROPOSAL

The literature on tariffs and that on commodity taxes have established sufficient conditions under which tariff or commodity tax reform impr oves welfare. Since less developed countries need to raise certain rev enue from indirect taxation, we consider a policy reform within the co mplete indirect tax structure (i.e. an increase in consumption taxes c ombined with a decrease in tariffs) that improves welfare and raises g overnment revenue. We demonstrate that when uniform reductions in trad e taxes accompany offsetting increases in consumption taxes, so that c onsumer prices remain constant, welfare improves and government revenu e increases if the initial position provides a net subsidy to producer s.