Taxes, trade, and the pattern of world production.

The two essays in this dissertation address aspects of tax policy in the open economy. The first essay is an analysis of the incidence of capital income taxes in a small, open economy with mobile factors. The second essay explores optimal trade taxes and production patterns for a country with monopoly power on goods and factor markets. Linking these two essays is an explicit recognition of the potential for tax-induced changes in the international pattern of production. The first essay extends the two-sector general equilibrium model of capital income tax incidence to the case of a small economy producing two traded goods with internationally mobile factors. Factor mobility is specified through the use of elasticities of factor stocks to international differences in factor returns. It is shown that either general or sector-specific capital income taxes raise the possibility that production of both traded goods is not feasible and the values of the mobility parameters at which taxation will induce specialization are derived. It is found that if diversification is maintained, the incidence of capital income taxes is identical to that for an economy with immobile factors. Only when factor supplies are sufficiently altered so that specialization occurs do relative tax burdens depends on relative mobility. The second essay contains a derivation of the conditions for welfare maximization when a country is large enough to influence world prices of traded goods and factors. Formulae for optimal taxes on goods and factor trade are obtained from these conditions. The analysis also focuses upon the pattern of world production consistent with optimal trade taxes, particularly the possibility that, in a two-good model, the home and foreign countries produce both goods. It is shown that a diversified market equilibrium exists if a diversified solution to the home welfare maximization problem exists. Several aspects of such an equilibrium are described and a numerical example is used to prove existence. The essay concludes with a discussion of the difficulties for trade tax analysis caused by the endogeneity of world production patterns to the choice of tax rates.PhDEconomic theoryEconomicsUniversity of Michiganhttp://deepblue.lib.umich.edu/bitstream/2027.42/162339/1/9001676.pd