Part 1 - AL-Tax

International Taxation HandbookDefinition. A competitive equilibrium for an international tax system τ is anarray [P, (P i ,x i ,y in ,y it ) iI ] such that:1. Given P, y in and y it solve the problem of the respective firm.2. Given P i , x i solves the maximization problem of consumer i.3. P, P i , and τ i satisfy (1 τ ai )p at p ai , (1 τ bi )p bt p bi , (1 τ ri )p rt p ri ,(1 τ ui )p ut p ui , (1 τ ii )p i p in , and (1 τ li )w i p il .4. Each government balances its budget, i.e.5. (x i ,y in ,y it ) iI is feasible, i.e.pg j j τljwl j j τjj pc j j ∑ τij pc it ij.c g k lθ 1 θi i in in,∑ cij k lj∈Ilin lit li,∑( kinkit) ∑ ki.i∈Iϕϕ 1it itOne may wonder why a balance-of-payment constraint was not considered inthe above definition. It can be shown that the conditions we spelled out implythat each country satisfies its balance-of-payment constraint.,i∈Ii∈I15.4 The experimentsThe goal of this section is to evaluate welfare consequences and real effects of tradeagreements and tax reform for the Brazilian economy. To carry out this task, we proceededin the following way. First, we calibrated the model so that it matched someselected features of the actual Brazilian, US, Argentinian, and world economies (thecalibration procedure is detailed in Cunha and Teixeira, 2004). Then, we computedthe competitive equilibrium associated with the calibrated parameters. This equilibriumis our benchmark. Finally, we computed the competitive equilibria for threedistinct international tax systems and compared the outcomes. The calibrated tariffand tax rates for Brazil, Argentina, and the USA are presented in Table 15.1. Notethat each line indicates how a country taxes its domestic goods and the goods producedby other countries, as well as its tax on labor income.346