What is a Revenue Tariff?

Definition: A revenue tariff is a tax rate applied with the purpose of obtaining direct income from corporate revenues. A revenue tariff has a substantial effect on price levels.

What Does Revenue Tariff Mean?

Since governments need massive resources to accomplish their goals, they must look for revenues from various sources. Governments run public offices to perform a wide range of activities that are assumed to improve the population’s welfare.

Infrastructure investments, human resources and numerous materials and services are required so citizens and firms are obliged to finance them. All taxes provide income but some of them are particularly designed and implemented for that. The most common revenue tariff is a tax on imported goods in the form of an ad valorem tariff. This means a fixed percentage that allows charging a fee in proportion to the import value.

In order to avoid strong changes in the price of imported items, this percentage tend to be low, often up to 5%. The most radical defenders of free trade think that even low rates have an impact on economic decisions because they artificially protect domestic industries. Nevertheless, many experts think that the price distortion is negligible and the collected revenues worth it.

Example

In a small developing country the Congress is planning to impose a tax levy of 30% on a few imported goods considered luxury items with the purpose of collecting additional income because public revenues are not enough. Congressmen estimated that US$ 150,000 would be raised weekly. An economist explained that the high rate will make those items too expensive for many consumers and therefore the import value and the collected income will be surely lower.

Instead, he recommends the application of an additional rate of 2% to all imported goods. This will allow raising money without affecting the prices in a notable extent. A middle ground was found after negotiations were undertaken and a 3% tax levy for all imported goods was sanctioned.