Premium
The Financing of Foreign Aid and Welfare: Income Versus Consumption Tax
Author(s) -
Hatzipanayotou Panos,
Michael Michael S.
Publication year - 2000
Publication title -
review of development economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.531
H-Index - 50
eISSN - 1467-9361
pISSN - 1363-6669
DOI - 10.1111/1467-9361.00076
Subject(s) - economics , consumption (sociology) , welfare , consumption tax , revenue , general equilibrium theory , tax revenue , developing country , macroeconomics , monetary economics , public economics , international economics , state income tax , tax reform , finance , economic growth , market economy , social science , sociology
Empirical evidence shows that developed countries use income or consumption taxes to generate tax revenue, of which they transfer a certain fraction as aid to less developed countries. This paper constructs a two‐country general equilibrium trade model that takes into account these realities, and examines the terms of trade, employment and welfare effects of international transfers when the donor country increases the fraction of its income or consumption tax revenue transferred as aid. The desirability of each method of aid financing is discussed from the viewpoint of national and world welfare, and conditions are identified under which aid improves world welfare with the one method of financing, and may worsen it with the other.