Joint trade liberalization and tax reform in a small open economy: the case of Egypt

We develop a CGE model of the Egyptian economy to analyze the impact of various trade liberalization scenarios, allowing distortionary domestic taxes to vary endogenously in order to satisfy a fixed real government revenue target. We decompose computed welfare gains into effects from tax reform, trade reform, and their interaction. Scenarios include removal or unification of the consumption tax, capital tax, or both, and tariff unification, a free-trade agreement with the European Union, and unilateral tariff elimination. Welfare effects depend critically on the type of revenue replacement tax. While both are important, neither trade-policy reform nor tax reform dominates.