tailieunhanh - The effect of trade liberalization on Vietnamese household welfare with different tax policies

Using the Dynamic Computable General Equilibrium framework, this study examines and compares the impacts of tariff reduction in association with government tax policy alternatives for satisfying a fixed budget income target. | ECONOMIC DEVELOPMENT No. 204, August 2011 THE EFFECT OF TRADE LIBERALIZATION ON VIETNAMESE HOUSEHOLD WELFARE WITH DIFFERENT TAX POLICIES by NGUYEÃN MAÏNH TOAØN* Using the Dynamic Computable General Equilibrium (DCGE) framework, this study examines and compares the impacts of tariff reduction in association with government tax policy alternatives for satisfying a fixed budget income target. It is found that the effects of trade liberalization on the welfare of each household group depend strongly on the government polices dealing with deficit caused by tariff reduction. Replacing tariff with direct taxes seems to be more desirable than indirect taxes, though it will cause a considerable increase in foreign debt, and the highest improvement of the total national welfare may be obtained if the government can cut expenditure or find some sources of finance without increasing other taxes. Keywords: Dynamic Computable General Equilibrium, income distribution, tax policies 1. Introduction Trade liberalization and its impacts on the distribution of income have come to be one of the biggest concerns in Vietnam recently. In general, lowering of barriers to the international trade gives opportunities to accelerate growth, enhance productivity through the process of specialization, promote competition and create incentives for increasing efficiency. In the context of Vietnam, although it is widely proven that trade liberalization policies are likely to positively impact on the economic situation at the national level, their effects at the industry level and on the welfare of various households may be different. In addition, elimination of tariffs may significantly affect government revenue. Toaøn (2006) found that the reduction in nominal tariff rates down to 5% will lead to a decline in the government revenue by in the short term and in the long term. Because the government revenue is needed for maintaining government activities and the national socialeconomic .