Taxes and Subsidies on Different Goods in the Rural Sector

Raaj K. Sah and Joseph E. Stiglitz

in Peasants versus City-Dwellers

Published in print February 2002 | ISBN: 9780199253579
Published online January 2005 | e-ISBN: 9780191601682 | DOI:
Taxes and Subsidies on Different Goods in the Rural Sector

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A major issue facing many less developed countries (LDCs) is whether cash crops such as sugar cane, tobacco, and agricultural inputs such as fertilizers and tractors (collectively referred to as production goods) should be subsidized to increase agricultural production, or taxed to raise investible surplus. This chapter addresses the structure of taxes, subsidies, and prices on different goods in the rural sector. Earlier formulations on pricing and taxation are extended to determine the optimal taxes on a variety of inputs and outputs, and tax policies derived for cash crops and manufactured agricultural inputs. The rules that are derived for reform in taxes on certain categories of goods are not only parsimonious in the information required to implement them, but also lead to Pareto-improving reforms; i.e. no member of society is hurt in the implementation of the rules. The Pareto-improving reform analysis indicates that there is an a priori case against the simultaneous taxation of some production goods, and the subsidization of others.

Keywords: agricultural inputs; cash crops; less developed countries (LDCs); prices; rural sector; subsidies; tax policies; taxation; taxes

Chapter.  6745 words. 

Subjects: Economic Development and Growth

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