Productivity Gaps and Tax Policies Under Asymmetric Trade

Lucas Bretschger, Simone Valente (Lead Author)

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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.
Original languageEnglish
Pages (from-to)1391-1427
JournalMacroeconomic Dynamics
Volume22
Issue number6
Early online date9 Sep 2016
DOIs
Publication statusPublished - Sep 2018

Keywords

  • Productivity Gaps
  • Tax Policy
  • International Trade
  • Endogenous growth

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