PRODUCTIVITY GAPS AND TAX POLICIES UNDER ASYMMETRIC TRADE. (9th September 2016)

• Record Type: Journal Article
• Authors: Bretschger, Lucas; Valente, Simone
• Is Part Of: Macroeconomic dynamics. Volume 22:Number 6(2018)
• Page Start: 1391
• Page End: 1427
• Publication Date: 2016-09-09
• Subjects: Productivity Gaps, -- Endogenous Growth, -- International Trade, -- Tax Policy; Macroeconomics -- Periodicals; 339.05
• DOI: 10.1017/S1365100516000729
• Languages: English
• ISSNs: 1365-1005

Abstract

Abstract : We build a two-country model of endogenous growth to study the welfare effects of taxes on tradable primary inputs when countries engage in asymmetric trade. We obtain explicit links between persistent gaps in productivity growth and the incentives of resource-exporting (importing) countries to subsidize (tax) domestic resource use. The exporters' incentive to subsidize hinges on slower productivity growth and is disconnected from the importers' incentive to tax resource inflows—i.e., rent extraction. Moreover, faster productivity growth exacerbates the importers' incentive to tax, beyond the rent-extraction motive. In a strategic tax game, the only equilibrium is of Stackelberg type and features, for a wide range of parameter values, positive exporters' subsidies and positive importers' taxes at the same time.