Consumption Tax, Nontraded Goods and Welfare

Wataru Johdo

Faculty of Economics, Tezukayama University, Nara, Japan.

DOI: 10.4236/tel.[phone]                

Abstract

This paper studies the welfare effects of a consumption tax rise based on the two-sector small open economy model of Obstfeld and Rogoff (1995) and Lane (1997). The main findings of our analysis are that 1) in the case of free trade, the consumption tax rise has no effect on welfare, 2) when there is the nontraded goods sector, the consumption tax rise has a negative effect on welfare, and 3) the larger the share of nontraded goods in consumption is, the larger the negative welfare effect of consumption tax will be.

Keywords

Consumption Tax; Nontraded Goods; Trade Openness; Small Open Economy; Welfare

Conflicts of Interest

The authors declare no conflicts of interest.

References

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