TAX POLICY WITH ADMINISTRATION COSTS IN A SMALL OPEN ECONOMY

Conventional studies in optimal tax policy usually abstract from the administration costs of taxes. When a tax policy is implemented to control economic activities, administration costs are generally incurred. The purpose of this dissertation is to explicitly incorporate the administration costs of each tax instrument into the analysis to see how the optimal tax instruments should be chosen in a small open economy.;Major findings of our studies are as follows: (1) Our analysis with variable administration costs indicates the possibility of the reversal of the traditional tax policy instruments ranking. The inclusion of fixed administration costs even strengthens this possibility. With lower administration costs of tariffs compared with other tax policy instruments specifically due to the smaller number of collection activities of tariffs, tariff policy may be better to use for the correction of consumption and production distortions. (2) Pareto Optimality conditions of Samuelson's public goods production model of a closed economy apply also to that of a small open economy. So the proportional taxes that do not change the domestic relative prices are suggested for the financing of the public goods production. Inclusion of administration costs of taxes does not change the suggestion of using proportional taxes. (Abstract shortened with permission of author.).;Our main studies are presented in four chapters. Chapter two contains the derivation of the administration cost function of each tax instrument which will become the crucial factor of our study. The administration costs are the sum of the collection costs of taxes and the redistribution costs of tax revenue collected. And they are viewed as consisting of two types of costs, fixed cost and variable cost. Chapter three, incorporating administration costs of taxes discusses welfare implication of various tax policy instruments, such as consumption taxes, production subsidies, and tariffs. The aggregated production possibilities are reformulated to include the production of real resource using tax administration services. Chapter four presents a discussion of the tax policy ranking for the correction of distortions in consumption and production. Finally, in chapter five, tax policy for the finance of public goods production in a small open economy is discussed by extending the well-known Samuelson public goods production model.