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Licensed Unlicensed Requires Authentication Published by De Gruyter Oldenbourg December 12, 2017

Tax on Traded Goods, and Corrupt Non-traded Goods Sector: Implications for Intermediation Activities

Biswajit Mandal
From the journal Review of Economics

Abstract

This paper uses a Heckscher-Ohlin nugget framework with both traded and non-traded goods. Traded goods are subject to tax whereas non-traded good does not pay tax but is beset with corruption related intermediation. Our motive is to investigate the comparison of the effects of corruption and tax cut. We assume only the non-traded sector to be corruption affected. We argue that a fall in the degree of corruption surprisingly increases the number of intermediators while tax change has no effect on it. But the size of the intermediation activities expands in both the cases. Low corruption diminishes the exportable production and raises importable production while a tax cut does not have any such effect. The welfare implication is ambiguous in case of a decrease in cost of corruption. A tax cut, however, raises welfare unambiguously.

JEL Classification: F1; D73; D5; D6

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Published Online: 2017-12-12
Published in Print: 2018-3-26

© 2018 Oldenbourg Wissenschaftsverlag GmbH, Published by De Gruyter Oldenbourg, Berlin/Boston

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