Part 1 - AL-Tax

International Taxation HandbookTable 15.3Experimental results for a higher initial US tariff on Brazilian goodsVariable Mercosur FTAA FTAA with tax reformc ab 0.18 0.07 0.91c bb 0.01 0.08 9.77c rb 0.05 0.28 1.27c ub 0.05 22.63 21.42c b 0.00 0.02 10.09l b 0.02 0.13 0.61l bn 0.02 0.44 5.50l bt 0.11 0.55 10.26k bn 0.06 0.85 7.27k bt 0.19 0.13 8.20k bn k bt 0.12 0.40 1.10y bn 0.01 0.59 6.16y bt 0.15 0.33 9.18GDP at benchmark prices 0.06 0.25 0.45Trade deficit 2.33 8.00 5.00Consumer price index 0.04 0.64 9.79Real net wage 0.04 0.20 8.75Real net private income 0.01 0.34 9.43Welfare gain (% of GDP) 0.00 0.10 2.42by a reduction in government expenditure. An interesting exercise would consistof opening the Brazilian economy to international trade and raising some taxrates to compensate for the tariff reduction. This exercise is left for futureresearch.The FTAA with tax reform experiment generated a huge welfare gain (whencompared to the previous two). There was a gain of the order of 2.42% of GDP. TheBrazilian consumer substituted away from c ab and c rb toward c bb , c ub , c b , and leisure.Recall that our model is static. Thus, statements about capital flows have to beevaluated with care. It is interesting to see that in the FTAA experiment the sumk bn k bt decreased by 0.54%, while in the last experiment it decreased by asmaller amount (0.38%). Hence, this third experiment of the FTAA with taxreform suggests that tax reform may help Brazil to attract capital.The third experiment generated a flow of production factors to the tradablesector. Both l bt and k bt increased. Resources left the nontradable sector. As a consequenceof this reallocation of resources, y bt grew and y bn fell.350