Analysis of tariff and tax policies in Bangladesh : a computable general equilibrium approach
The prime objectives of the study are to analyse the effects of tax and tariff policies in Bangladesh. Toward this end, different variants of computable general equilibrium models are developed and used to assess the distributional consequence of tax reform and to examine the resource allocation and income distribution effects of tariff liberalisation within the paradigm of both 'traditional' and 'new' trade theories. A computable general equilibrium model of the Bangladesh economy is developed to assess the distributional consequences of the indirect tax reform which involves the introduction of a value added tax system. The model captures specific features of a consumption-type and destination principle-based value added tax system which has been adopted in Bangladesh. An alternative model of the Bangladesh economy is also developed to analyse the effects of tariff liberalisation on resource allocation and income distribution under both competitive and non-competitive assumptions. The model explicitly incorporates 'market structure' variables such as marginal costs, the number of domestic firms, the excess profit condition, the market demand elasticities for domestic firms and increasing returns to scale. The models are static in nature and are calibrated to a 1988/89 data set compiled within the framework of a social accounting matrix (SAM). The social accounting matrix integrates different data sources and the input-output table to depict the major macroeconomic relations and provides a consistent macroeconomic data set for policy modelling. Such a framework is particularly useful for a country such as Bangladesh with sparse and conflicting data sources. The SAM is an attractive framework for locating inconsistencies and for resolving them in best the possible ways. The incidence effects of the indirect tax system under pre-VAT and VAT systems are based on two approaches: a simple approach and a computable general equilibrium approach. Two sets of policy experiments are carried out. First, excise duties of domestic production activities and sales taxes on imports are replaced by a revenue-neutral single rate of value-added tax. In the second experiment, the VAT system is extended to the service sector with a revenue-neutral VAT rate. The results of policy experiments indicate that because of exemptions on subsistence agricultural products, and because of the progressive structure of the tariffs, the overall indirect tax system would remain progressive even after the introduction of a single rate VAT. However, the overall indirect tax incidence appears to be less progressive under the VAT system compared with the pre-VAT system. The effects of tariff liberalisation on resource allocation and income distribution are also examined in this study. It is observed that the results of tariff liberalisation are sensitive to the way the model is specified. It is also observed that in the competitive and constant returns to scale model variant, resources move from the heavily protected sector to the less protected sectors as a result of tariff liberalisation. In contrast, the heavily protected manufacturing sectors turn out to be the main beneficiary of liberalisation when imperfect competition is introduced. Expansion of manufacturing output appears to come from the pro-competitive effects of tariff liberalisation. On the other hand, almost all the manufacturing sectors show much larger output growth with the incorporation of increasing returns to scale. The larger expansion of output of manufacturing sectors is due to a reduction in unrealised scale economies. The income distribution effects of tariff liberalisation are captured through the changes in income levels of the six household groups and changes in factor income and factor returns. The redistribution of income under liberalisation appears to favour the low income household groups. However, it appears that the relative progressivity and regressivity in the distribution of household income depend on the relative changes of capital and labour income. The association between market structure variables and profitability in the manufacturing sector of Bangladesh is also analysed in this study. This exercise provides some evidence on the association between industrial structure and profitability and assesses the importance of foreign and domestic factors on industry profitability. Two alternative measures of concentration namely concentration ratio and Hirschman-Herfindahl index and two foreign competition variables such as import shares and effective tariff rates are used to examine this association. The results of this exercise indicate that profitability is significantly related to concentration levels in the manufacturing sector of Bangladesh. It also reports that foreign competition variables play a significant role in affecting profitability in domestic industries. It is observed that the profitability is higher in those industries where concentration levels are high and import shares are low and effective tariff rates are high.