Traded Goods, Tax, and Intermediation – the Role of Corrupt Non-traded Sector

This chapter again uses a H-O nugget framework for a small open economy. The competitive trade model here has both traded and non-traded goods. Traded goods are subject to tax whereas non-traded good does not pay tax but is beset with corruption-related intermediation. Such possibility of non-payment of tax arises due to the presence of intermediation sector. My motive is to investigate the comparison of the effects of corruption and related costs and tax cut. In this backdrop, I assume only the non-traded sector to be corruption affected. I find that a fall in the degree of corruption surprisingly increases the number of intermediators while tax change has no effect. But the size of the intermediation activities expands in both the cases. Low corruption reduces the exportable production and raises importable production while a tax cut does not have any such effect. The welfare implication is not unambiguous in case of a decline in the cost of corruption. A tax cut, however, raises welfare unambiguously.