Date of Award


Document Type


Degree Name

Master of Arts (MA)

Legacy Department


Committee Member

Dr. William Dougan, Committee Chair

Committee Member

Dr. Scott Baier

Committee Member

Dr. Raymond Sauer


This paper tests the hypothesis that the transition from border to domestic taxation over the past three decades has reduced welfare. Border taxes consist of import tariffs and export duties, while domestic taxation consists of value-added taxes (VATs) and general sales taxes (GSTs). This investigation uses Auriol and Warlters (2012) model to calculate the marginal cost of funds (MCF) for 106 countries across five tax instruments: domestic, import, export, capital, and labor. If MCF estimates for trade taxes are larger for domestic taxes than trade taxes welfare has been reduced by the transition to domestic taxation. Although MCF calculations vary between countries, the results suggest that in most instances welfare would be improved by increasing trade taxes and reducing factor taxes (taxes on labor and capital). The high MCF among factors is driven by the presence of an informal sector. Factor tax increases led to substitution from formal factors to informal factors, reducing the overall tax base. The failure of governments to equalize MCF across instruments suggests a redistributive objective in tax policy as opposed to an efficiency objective.