The General Equilibrium Effects of Commodity Taxes in an Economy With Inter-Industry Flows

Abstract

A computational method is presented for obtaining a general equilibrium solution in a static neoclassical model of an economy which has intermediate products, exports and imparts, and tax distortions. Using an input-output table, the parameters of the various demand and supply functions in the economy can be chosen so that the general equilibrium solution exactly replicates the real world. The model is then applied to estimate the effects of commodity tax distortions in the Canadian economy using various assumptions about the form of production functions. The method is to replace the commodity tax distortions with lump-sum taxes, compute a new general equilibrium solution, and compare it with the original one to obtain changes in resource allocation, relative prices, the exchange rate, and economic welfare.

Get full access to this article

View all access options for this article.

References

Dominion Bureau of Statistics (1969) The Input-Output Structure of the Canadian Economy 1961, Vol. I. Cat. No. 15-501, Ottawa.

——— (1966) Review of Employment and Payrolls. Cat. No. 72-201, Ottawa.

Harberger, A.C. (1971) "Three basic postulates for applied welfare economics: an interpretive essay." J. of Econ. Literature 9: 785-797.

——— (1966) "The efficiency effects of taxes on income from capital," in M. Krzyzaniak (ed.) Effects of Corporation Income Tax. Detroit: Wayne State Univ. Press.

Scarf, H. (1969) "An example of an algorithm for calculating general equilibrium prices." Amer. Econ. Rev. 59: 669-684.

Shoven, J.B. and J. Whalley (1973) "General equilibrium with taxes: a computational procedure and an existence proof." Rev. of Econ. Studies 40: 475-490.

——— (1972) "A general equilibrium calculation of the effects of differential taxation of income from capital in the US." . J. of Public Economics 1: 281-321.

Statistics Canada (1974) Input-Output Tables for the Canadian Economy. Ottawa. (unpublished)

Tsurumi, H. (1970) "Nonlinear two-stage least squares estimation of CES production functions applied to the Canadian manufacturing industries, 1926-1939, 1946-1967." Rev. of Economics and Statistics 52: 200-207.