14th journées Louis-André Gérard-Varet

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Tax Devaluation with Endogenous Margins
Clément Carbonnier, Pascal Belan, Martine Carré

Last modified: 2015-03-12

Abstract


Several European countries have recently envisaged to implement fiscal policies that constitute alternatives to monetary devaluation in the context of a monetary union. Social value-added tax is one of these alternatives: it consists to shift fiscal revenue from payroll tax to value-added tax, with the objective to address simultaneously competitiveness and employment problems. We analyze the consequence of such a policy in a model of international trade with heterogeneous firm \textit{à la} Melitz. We depart from the CES case for taking account of the way changes in the tax rates may modify competition between producers, their margins, and the way these changes are reflected in prices. We first show that social VAT is neutral for zero trade balances. Then, in a two-country model, we show that, after the introduction of the social VAT, intensive and extensive margins increase in the net importing country regardless of the country thatimplements the policy. Both margins decrease in the net exporting country. Considering non-CES utility functions, the effects of social VAT are attenuated (amplified) if love for variety increases (decreases) with quantities.

Keywords


Tax devaluation; International trade