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Tax devaluation with endogenous margins

Belan, Pascal; Carbonnier, Clément; Carré, Martine (2015), Tax devaluation with endogenous margins. https://basepub.dauphine.fr/handle/123456789/15039

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taxdevaluation.pdf (823.8Kb)
Type
Document de travail / Working paper
Date
2015
Publisher
Université Paris Dauphine
Published in
Paris
Pages
23
Metadata
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Author(s)
Belan, Pascal

Carbonnier, Clément

Carré, Martine
Abstract (EN)
Several European countries have recently envisaged to implement fiscal policies that constitute alternatives to monetary devaluation in the context of a monetary union. Social value-added tax is one of these alternatives: it consists to shift fiscal revenue from payroll tax to value-added tax, with the objective to address simultaneously competitiveness and employment problems. We analyze the consequence of such a policy in a model of international trade with heterogeneous firm à la Melitz. We depart from the CES case for taking account of the way changes in the tax rates may mo dify competition between producers, their margins, and the way these changes are refefected in prices. We first show that social VAT is neutral for zero trade balances. Then, in a two-country model, we show that, after the introduction of the social VAT, intensive and extensive margins increase in the net importing country regardless of the country that implements the policy. Both margins decrease in the net exporting country. Considering non-CES utility functions, the effects of social VAT are attenuated (amplified) if love for variety increases (decreases) with quantities
Subjects / Keywords
Fiscal devaluation; social VAT; tax reform; international trade
JEL
F12 - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
H20 - General

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