Part 1 - AL-Tax

Chapter 15AbstractThis chapter uses a general equilibrium model to evaluate the impacts of trade agreementsand tax reforms on the Brazilian economy. The model predicts that welfare gains occurwhether Argentina reduces the tariffs it places on Brazilian products or the Free Trade Areaof the Americas (FTAA) is implemented. However, the FTAA engenders larger welfare gains.These gains will be even larger if the FTAA is implemented simultaneously to a reductionon domestic consumption taxes. These findings suggest that most of the gains come from thereduction of Brazilian tariff and tax rates. They also stress the importance to improve the taxaccounting system in emerging markets as a necessary condition to accomplish the potentialwelfare gains.15.1 IntroductionIn the post-World War II era, commerce of goods and services has increasedsteadily. At the same time, the world has seen the formation of trade blocks inwhich a group of countries agree to adopt free trade policies among themselves(some evidence on this is provided by Bergoeing and Kehoe, 2001). Debate hassurrounded the formation of each block. This debate is of particular interest in aregion like Latin America, where countries have generally followed what is knownas import substitution policies. These policies prescribe closure of the internalmarket, so that domestic firms will be protected from external competition.Simultaneously, domestic producers may also receive subsidies. At a time whenthe countries of the American continent are discussing the formation of theFTAA (Free Trade Area of the Americas), the importance of studying the consequencesof the formation of these blocks on the Brazilian economy speaks foritself. We study the possible gains and consequences from joining the FTAA.Brazilian entrepreneurs have pointed out some problems in joining the FTAA.They claim that it is difficult to compete with the US economy in a free tradezone, because of the Brazilian tax system, among other things. Brazil heavilytaxes labor and also uses a cascading taxation system that increases the cost andprices of Brazilian goods. Brazilian entrepreneurs argue that Brazil should reformits tax system before joining the FTAA.In this chapter we evaluate the impacts of FTAA and tax reform on the Brazilianeconomy in a unified framework. We adopt the computational experimentmethodology presented in Kydland and Prescott (1996). We then discuss theimplications of our results to the accounting practices of emerging economies.We assess the impact of FTAA and tax reform quantitatively using a computablegeneral equilibrium model. The use of a general equilibrium model to341