Part 1 - AL-Tax
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Part 1 - AL-Tax

Part 1 - AL-Tax Part 1 - AL-Tax

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Chapter 15is that the USA has nontariff barriers (NTBs) in many sectors, such as steel, sugar,and orange juice. Additionally, the US government heavily subsidizes the country’sagricultural sector. Therefore, the effective US average tariff on Braziliangoods is higher than the one that we computed. Since we could not compute atariff adjusted for the NTBs, we assumed that the USA placed the same averagetariff as the European Union on Brazilian goods. We then ran exactly the samethree experiments. The impacts on the Brazilian economy were roughly thesame. In particular, the welfare gains were virtually unchanged.The computational experiments we ran suggest that most welfare gains for theBrazilian people arise from the reduction of Brazilian tariffs and domestic taxrates. This finding has a striking implication regarding two particular policies.First, Brazil should open to trade and carry out tax reform regardless of whetherits trade partners proceed in the same way or not.Second, Brazil should improve its accounting systems to prepare for the benefitsof tax reform. The results presented in this chapter have an enormous impactfor tax accounting research in emerging markets. This article computes the effectsof tax reforms and of free trade agreements on GDP and welfare. It shows how thetax system is important to wealth creation at a macroeconomic level, but in themodel it is assumed that the value added tax (VAT) system proposed will workperfectly without significant transaction costs.The accounting tax system plays a significant role in the functioning of theVAT system. A well-functioning accounting system is a necessary condition forthe proposed solution to work. In other words, the model assumes that Brazil hasan efficient accounting system guaranteeing the welfare gains stemming from thereforms. Unfortunately, this is not presently the case in several emerging marketsand especially in Brazil.This chapter is organized as follows. In section 15.2 we describe the modeleconomy. In section 15.3 we define competitive equilibrium. In section 15.4 wecarry out the experiments. In section 15.5 we discuss the implications of theresults for accounting research for emerging nations and some adjustments webelieve to be required to ensure that the accounting system works properly in anemerging economy.15.2 The economyThere exist four countries: Brazil (b), Argentina (a), the USA (u), and the Rest ofthe World (r). The set of countries is represented by I {a,b,r,u}. Each country343

International Taxation Handbookproduces a tradable good and a nontradable good. These goods are countryspecific.Each nation i has a representative agent endowed with k i units of capital andone unit of time that she can allocate to market and nonmarket activities (call itleisure). Capital is mobile across countries but labor is not.Let c ij denote the amount of the tradable good produced by country i and consumedin country j; c i denotes the nontradable good of country i. The commodityspace is L 13 . A generic point in L is denoted by x,x (c aj ,c bj ,c rj ,c uj ,c a ,c b ,c r ,c u ,l a ,l b ,l r ,l u ,k),where j I, c ij is the good produced in country i and exported to country j, c i isthe nontradable good produced by country i, l i is the amount of labor input incountry i, and k is the capital stock.The consumption set of a consumer in country i I is:X { x∈ L : l≤ 1; k≤k ; c l 0 for j i},i i i i j j(15.1)where l i is the amount that a consumer from country i I allocates to work andk i is the amount of capital services that a consumer rents to firms, given that thisconsumer has – k i units of capital services to be rented.15.2.1 PreferencesPreferences of a consumer of country i I are represented by the utility function:αi αααα ai bi ri uiu ( x) [ c ( c c c c )1αγ i ] ( 1 )1 γ,i i ai bi ri uiwhere α ai α bi α ri α ui 1, c ji is the good consumed by the representativeconsumer in country i produced in country j, c i is the nontradable good of countryi, and l i is the amount of consumer time allocated to work.l i15.2.2 TechnologiesIn each country, firms operate two technologies, one that produces the nontradablegood and one that produces the country-specific tradable good. The productionset of the nontradable good of country i I is:Y ( n) {y∈L : y≤kθθ l1; y l 0 for j i;yij 0, }i i i j j344

International <strong>Tax</strong>ation Handbookproduces a tradable good and a nontradable good. These goods are countryspecific.Each nation i has a representative agent endowed with k i units of capital andone unit of time that she can allocate to market and nonmarket activities (call itleisure). Capital is mobile across countries but labor is not.Let c ij denote the amount of the tradable good produced by country i and consumedin country j; c i denotes the nontradable good of country i. The commodityspace is L 13 . A generic point in L is denoted by x,x (c aj ,c bj ,c rj ,c uj ,c a ,c b ,c r ,c u ,l a ,l b ,l r ,l u ,k),where j I, c ij is the good produced in country i and exported to country j, c i isthe nontradable good produced by country i, l i is the amount of labor input incountry i, and k is the capital stock.The consumption set of a consumer in country i I is:X { x∈ L : l≤ 1; k≤k ; c l 0 for j i},i i i i j j(15.1)where l i is the amount that a consumer from country i I allocates to work andk i is the amount of capital services that a consumer rents to firms, given that thisconsumer has – k i units of capital services to be rented.15.2.1 PreferencesPreferences of a consumer of country i I are represented by the utility function:αi αααα ai bi ri uiu ( x) [ c ( c c c c )1αγ i ] ( 1 )1 γ,i i ai bi ri uiwhere α ai α bi α ri α ui 1, c ji is the good consumed by the representativeconsumer in country i produced in country j, c i is the nontradable good of countryi, and l i is the amount of consumer time allocated to work.l i15.2.2 TechnologiesIn each country, firms operate two technologies, one that produces the nontradablegood and one that produces the country-specific tradable good. The productionset of the nontradable good of country i I is:Y ( n) {y∈L : y≤kθθ l1; y l 0 for j i;yij 0, }i i i j j344

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