Ramsey Taxation in the Global Economy

Résumé

How should fiscal and trade policy be set cooperatively when government expenditures must be financed with distorting taxes? We study this question in canonical dynamic general equilibrium models of international trade using both the Ramsey and Mirrlees approaches. We show that free trade and unrestricted capital mobility are optimal. One way to implement efficient outcomes is to tax final consumption goods and labor income. We study alternative tax systems and show that taxing returns on assets held by households at a uniform rate and not taxing corporate income yields e¢ cient outcomes. We argue that border adjustments that exempt exports from and includes imports in the tax base are desirable. Destination and residence based tax systems are desirable compared to origin and source based systems.

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