Part 1 - AL-Tax

International Taxation HandbookTable 15.2Experimental resultsVariable Mercosur FTAA FTAA with tax reformc ab 0.18 0.01 0.97c bb 0.01 0.10 9.76c rb 0.05 0.34 1.32c ub 0.05 22.56 21.35c b 0.00 0.02 10.08l b 0.02 0.16 0.63l bn 0.02 0.42 5.48l bt 0.11 0.42 10.13k bn 0.06 0.91 7.34k bt 0.19 0.08 7.97k bn k bt 0.12 0.54 0.38y bn 0.01 0.60 6.17y bt 0.15 0.16 9.00GDP at benchmark prices 0.06 0.32 0.52Trade deficit 2.39 10.88 7.80Consumer price index 0.04 0.69 9.84Real net wage 0.04 0.16 8.71Real net private income 0.01 0.32 9.41Welfare gain (% of GDP) 0.00 0.10 2.42Despite the small impact of the fall in τ ba on the Brazilian economy, the Mercosurexperiment provides some insights. Since both k bn and k bt went up, Mercosur generateda capital flow to Brazil. The physical output went up in both sectors. Hoursworked went up as well. But the amount of labor in the nontradable sector wentdown. There was some reallocation of resources across the two sectors of theBrazilian economy. The consumption of all goods increased, the real GDP wentup, the trade deficit fell, and CPI, real wages and real private income increased.The FTAA experiment generated an increase of 10.88% in the Brazilian tradedeficit. The welfare gain was 0.10% of the benchmark GDP. This is still a modestfigure, but far larger than the Mercosur example. Brazilian consumption of theAmerican tradable good (c ub ) increased by 22.56%. All other variables changedby less than 1%. Except for the trade balance and c ub , the FTAA has smallimpacts on the variables.Observe that both c ab and c ub went up, while l b , c b , c bb , and c rb fell. There was areallocation of labor from the nontradable to the tradable sector of the Brazilian economy.Capital utilization was down in both sectors, and capital outflow took place.348