ABSTRACT
We build up a simple general equilibrium model of politically optimum tariff. With tariff revenue financing the government’s economic programmes and thus the size of the government, we show that the government chooses a tariff rate higher than the revenue-maximising tariff to maximise political support from the domestic income earners. Thus, if the government pre-commits itself to a tariff reform, then it might face political resistance and lose political support due to the distributional consequences of the tariff reform. At the same time, the politically optimum high tariff rate leads to a less than the largest size that a revenue-maximising tariff can support. That is, even though larger government expenditure (and size) generates more employment and greater political support from the working class, overall distributional consequences force it to settle for a smaller size and higher tariff rate.
