Tax Wedges and Mobile Capital

Abstract

An import tariff or an export tax drives a wedge between the domestic price of a traded good faced in one country and that in another. But what can be said about the price of the taxed good relative to the price of untaxed goods in two countries? The standard Lloyd Metzler and Abba Lerner potentiall y paradoxical answers to this question are reconsidered in a trading world where one kind of sector-specific capital is internationally mo bile. It is argued that there is a presumption that taxing trade in c ommodities tends to weaken the price (both domestically and in world markets) of the good which utilizes mobile capital. Copyright 1987 by The editors of the Scandinavian Journal of Economics.

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