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PRODUCTIVITY GAPS AND TAX POLICIES UNDER ASYMMETRIC TRADE

Published online by Cambridge University Press:  09 September 2016

Lucas Bretschger  and
Simone Valente
Lucas Bretschger
Affiliation:
Center of Economic Research, ETH Zürich
Simone Valente*
Affiliation:
School of Economics, University of East Anglia
*
Address correspondence to: Simone Valente, School of Economics, ARTS 3.50, University of East Anglia, NR4 7TJ Norwich, UK; e-mail: s.valente@uea.ac.uk.
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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.

Keywords

Productivity GapsEndogenous GrowthInternational TradeTax Policy
Type
Articles
Information
Macroeconomic Dynamics , Volume 22 , Issue 6 , September 2018 , pp. 1391 - 1427
Copyright
Copyright © Cambridge University Press 2016 

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Footnotes

We owe special thanks to Emiliya Lazarova and Julie Ing for suggestions and feedback, as well as to the Associate Editor and Referees for their constructive comments. Any remaining errors are the authors' responsibility. Detailed proofs and derivations of the analysis in this article are available online as Supplementary Material. Further results and details can be found in the original working paper (Bretschger and Valente, 2016).

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Supplementary material: PDF

Bretschger and Valente supplementary material

Online Appendix

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