Lerner. The Symmetry Between Import and Export Taxes

Suntory and Toyota International Centres for Economics and Related
Disciplines
London School of Economics
The Symmetry between Import and Export Taxes

Author(s): A. P. Lerner
Source: Economica, New Series, Vol. 3, No. 11 (Aug., 1936), pp. 306-313
Published by: Wiley on behalf of London School of Economics and Political Science and Suntory
and Toyota International Centres for Economics and Related Disciplines
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EAUGUST
BetweenImportand
The Symmetry
Export Taxes
By A. P. LERNER
THis note does not arrive at any conclusionsnot previously

obtained by Bastable, Marshall and Pigou, but it shows
the nature of the slip which led Edgeworth to conclusions
contraryto theirs, and demonstratesthe applicability of
Marshall's "offer curve" apparatus to the elucidation of
this problem.'
If there are two countries,e (England) and g (Germany),
and two goods E and G which are produced by themrespec-
tively under conditions of perfectcompetitionand in the
absence of transport costs, tariffsor capital movements
between the countries, the equilibrium of international
trade is depicted by fig. i. Along the axes are measured
-Edgeworth,in an articleon " The Pure Theoryof InternationalTrade " (Economic7outrnal,
1894, p. 435), writes: "The want of symmetrybetween the effectsof restriction,and in
particulartaxes, on exportsand imports,is perhapsthe conclusionwhichcarnbe most peculiarly
and exclusively attributedto the mathematical method. The truth does not seem to have
beeniattained by the ordinarymethods." The peculiar resultis not due to the use of mathe-
matical methods but to an errorin their use committedby Edgeworth. He attributesto
the imianner in which a tax is collected effectswhich are really due to the formin which it is
spent. This results from the ambiguity,in discussing barter conditions, of the phrase " a
tax on exports". On page 6z4 of the same number of the EconoinicYournal, in a further
article of the same series,Edgeworth points out that Bastable in his " InternationalTrade
disagrees with this conclusion,but he fails to meet the point.
In the Economnic Journal, I897, p. 397, in a review of the second edition of Bastable's
"International Trade ", Edgeworth recants his general propositionabout the asymmetryof
importand exporttaxes, but maintainsthat it is still true in the case of taxes imposed in kind.
I-le seems here to be aware that it is not really the formof impositionof the tax that matters
huitits expenditureby the government,for he is carefulin his second line of defenceto say
"Let a tax be imposed . . . and consumedby the Governmiient, or at any rate not sold . . .
(imyitalics). He refersalso to some very obscure footnotesin his series of articles on " The
Pure Theory of Taxation" in the EconiomicJ7ournalof I897, which he alleges to contain
recantationsof his error. Yet in the collected papers (Vol. II, p. 39), published in i925, the
senterncequoted at the head of this note is repeated without significantalteration,although
a good deal of the argumentwhich appeared originallyto justifyit is leftout. The omission
is pointed out in a footnotewhich declares the missing argument" to be true only of some
import taxes in kind" (Edgeworth's italics).
The essence of the true theoryis to be found in Marshall's Money Creditand Commerce,
pp. i8i-i8z, and an admirablesummaryof the discussionis available in Pigou's Public Finiance,
pp. 198-200. One purposeofthisnote is to exoneratethe " mathematicalmethod" fromEdge-
worth's error-a task in which I am emboldened by my experience in lhavingrepeated this
errorin a Seminiarat the London School of Economics,
306
1936]SYMMETRY BETWEEN IMPORT AND EXPORT TAXES 307
quantities of the goods E and G. Any radiant from the
origin(like OR) indicatesa rate at whichE can be exchanged
forG (e.g. ON of E forNS of G). The curves e and g are
the offercurves of the countries. They indicatethe amount
of trade the inhabitants of the country are willing to do
with the other countryat each rate of exchange or price.
(E.g. at the price indicated by the radiant R, Germany
wants to move from0 to S, giving up NS of G for ON of
E, while England wants to go as far as T, giving up OL
of E for LT of G.) The supply of E for G is greaterthan
the demand and the rate of exchange becomes less favour-
able forEngland; the radiant moves to the rightto signify
that a largeramount of E must be exchanged for each unit
of G. The equilibriumpositionis reached when the radiant
passes through the point where the offercurves cut. S
coincides with T at P where OM of E is exchanged for
MP of G, since both countriesare willingto do just the same
amount of trade. Supply is equal to demand.
The imposition of a tax, whether on imports or on
exports, has the effectof making the price for traders in
England differentfromthat for traders in Germany,since
some of the goods are intercepted at the customs house
and appropriated by the tax collector. If the tax is on
G and German traders give OD of G for DC of E (fig. 2),
English traders receive only AB of G in exchange for the
OA of E that they give up, BC being taken by the tax
collector. The price to German traders is shown by the
radiant Rg, while that to English tradersis shown by Re.
These radiants form a pencil, the amplitude of which is
a measure of the size of the tax, irrespectiveof whether
E or G is the subject of the tax. The amplitude of the
pencil must be measured not by the angle between the
radiants but by drawing a perpendicularfrom any point
on one of the radiants to the axis lying beyond the other
radiant, and measuringthe proportionof this perpendicular
that lies within the pencil. The measure of the pencil is
thereforeCB or BF whichare equal to each other-signifying
CA BH
the irrelevancefor the measure whether E or G is taxed
CB CF BF KC
-
CA = KD-. A pencil of the am-
plitudeshownin figure2 indicatesa 40 per cent.tax ifimposed
entirelyon imports(G) or entirelyon exports (E), or both
308 ECONOMICA [AUGUST
an importand an export tax of such size that the sum of

their effectsis equal to a 40 per cent. tax.'
Thus in place of the single price-radiantwhich was swung
round to make supply equal to demand we have a pencil
which must similarly be swung round to the equilibrium
position,its amplitude being determinedby the size of the
tax or taxes and independentof whetherthey are imposed
on importsor exports.
The point (U in fig. z) where Re cuts the e curve shows
the supply of E and the demand for G by English traders.
The point (C) where Rg cuts the g curve shows the supply
of G and the demand for E by German traders. It is at
once clear that the supplies and demands thus given will
never equal each other however much we swing the pencil
round in either direction, since these points, lying on
differentradiants,can never coincide. If we draw a right-
angle (CTU) parallel to and in the same sense as the axes,
so that its upper extremity(C) lies at the point where the
g curve is cut by Rg and its righthand extremity(U) lies
at the point where the e curve is cut by Re, its vertical arm
(CT) will measure the excess in the supply of G over its
demand, while its horizontal arm (TU) will measure the
excess of the supply of E over its demand.2 But our right-
angle, measured in this way, is nothing but the absolute
measureof the amount of the taxes. Obviouslyour inability
to find the equilibrium position where supply equals demand
was due to our leaving out of account the demand by the
governmentout of the proceeds of the tax.
We can now go ahead. Given the amplitude of the tax
and the proportionin which the government(which here
includes any beneficiaries from the taxation) consumes
1 E.g. two taxes of zo per cent. and 25 per cent. have a joint effectof 40 per cent. since if
tlhesepercentagesare subtracted consecutivelyfromany item there will remain 6o per cent.
of the originalamount whatever the order in which this is done. In Fig. 2 if T bisects CB,
~KC
KC o CT KU
CT
cT representsa 20 per cent. tax on G and TU a 25 per cent. tax on E. -I0 -K
KS
==
zo SC KC - KS 20
-KC . SD = the rate of tax on E = KD KS
= 8 - 25 per cent.). Alternatively,
the pencil may be consideredas the sum of the two adjacent pencils which would be traversed
by CT and TU respectively,rememberingthat in adding the measure of the pencils, they
must be summed as consecutive percentage subtractions,so that zo per cent. + 25 per cent.
= 40 per cent.
2 Some readers may find it more satisfactoryto imagine C and U to be connected by a
rectangle,with sides parallel to the axes (CTUS in fig. a) of which the left side and the base
constituteour rightangle. The excess of the supply of G over its demand is then measured
by the heightof the rectangle,while the excess of the supply of E over its demand is measured
by the zwidthof the rectangle. Similarlywe may call CT the height of our rightangle and
TU its width.
1936] SYMMETRY BETWEEN IMPORT AND EXPORT TAXES 309
E and G, we can findthe equilibriumposition by swinging

the pencil round until the ratio between the length of the
arms of the rightangle CT corresponds to the ratio in
whichthe governmentconsumesG and E. Thus in fig.z, the
governmentdemand for CT of G and TU of E meets the
excess of supply by the traders,supply is equal to demand
and we have the equilibrium. If the pencil were swung
slightly towards the right, the rightanglewould become
flatterand wider,so that with the same governmentdemand
therewould be an excess of the supply of E over the demand
and an excess of the demand for G over its supply. This
would make E cheaper relatively to G so that the pencil
would swing back again towards the leftto the equilibrium
position.
In the limiting case where the governmentconsumes
only E, the rightanglereduces to a horizontal line whicl
traverses the pencil and meets the offercurves. Where
only G is consumedby the governmentit becomes a vertical
line.
From this examination it becomes clear that whether
the tax is collected in G or in E makes no differencesince
this plays no part in the determinationof the equilibrium
position. We can draw another rightanglewhich shows
the tax in the formin which it is collected. This taxation
rightangle,like the government consumption rightangle,
must fit into the pencil, since the pencil measures the
amplitudeof the tax, but, unlikethe consumptionrightangle,
it need not meet the offercurves in its extremities. That
was necessaryfor the consumptionrightangleonly because
the government expenditure had to raise the traders'
demands to their supplies.
The taxation rightangleis transformedinto a consumnp-
tion rightangleby a movement of one of its arms along
one of the radiants until it reaches the offercurve. Thus
in fig.2, if the tax had been raised entirelyin G, the taxa-
tion rightanglewould have had the limiting shape of the
vertical line CB. The governmentwould then exchange
G for E with English traders,moving the rightextremity
of the rightanglealong Re from B to U and the corner
of the rightanglefrom B to T, the rightangle acquiring
the shape CTU and becoming a consumption rightangle.
If the tax had been collected entirely in E, the initial
310 t CONOMICA [AUGUST
taxation rightangle would have been a horizontal line

traversingthe pencil and passing throughU and T. The
excess of E over UT would then be exchanged by the
government for TC of G. Edgeworth's error may be
considered as the failure to distinguish between these
two rightangles.
One extremityof the taxation rightanglemay be expected
to touch an offercurve, otherwiseit can be transformed
into a consumptionrightangleonlyby movingthe armsalong
both radiants. This would mean that the government
exchanges G for E as well as E for G-which is not im-
possible,since the pricesat whichit can do this are divergent
so that a profit emerges, but such an excursion of the
governmentinto active participation in foreign trade is
unnecessary,for these profits are just what would flow
to it from the taxation on the trade when done by the
traders.
The apparatus we have been developing enables us to
see the final equilibriumposition resultingfromthe imposi-
tion of a tax of given size, given the ratio of its consumption
between E and G, without drawing any of the magnifica-
tions, projections or other distortionsof the offercurves
that Edgeworthfound necessaryand which led to his slip.
All we need do is to fita governmentconsumptionrightangle
of the appropriatedimensionsinto the offercurves. Figures
3, 4 and 5 all show the two limitingcases of government
consumptionbeing restrictedto E (C,U,) or to G (C2U2)
and one intermediatecase with some of both E and G being
consumed (CTU). In fig. 3 both offercurves are elastic.
In fig.4 both are inelastic. In fig. 5 e is elastic while g is
inelastic. This figure can be turned round to show the
reverse case.
From a cursorystudy of these figuresit appears that in
all cases (a) English traders are better off (U1 is further
along e so that more G is boughtand on betterterms)while
Germantradersare worseoffthe greaterthe ratio of govern-
ment consumptionof E ; (b) English traderswill be better
offthan in the absence of the tax (apart fromany benefit
they may derive from the government consumption) if
the proportionof the tax (measured in G) that is spent
on E is greaterthan the elasticityof the g curve over the
relevant range;1 and converselythat German traders will

be betteroffthan in the absence of the tax if the proportion
of the tax (measured in E) that is spent on G is greater
than the elasticityof the e curve. (c) In this latter case,
the English nation, includingthose who enjoy the govern-
ment expenditure,will be worse offthan if there had been
no tax, in the sense that the new position, includingthe
governmentconsumption,is one wlhichis on a lowerindiffer-
ence curve as indicated by the offercurve. This raises
many difficulties, but there is an unambiguous loss if at
the same timethe g curveis inelastic,forthisgives a position
(C2 in fig. 4) wvhereEngland gives up more E and receives
less G than in the absence of the tax.
So far we have spoken in barter terms, but to suppose
that the tax is raised in money and the money then spent
on the commoditieshardly affectseven the form of the
argument. There is the same divergence between the
prices to the traders in the differentcountries,the same
gap between the radiants of the pencil, and it is filledin
the same way by the governmentdemand. It enables us
to considerthe possibilityof the governmenttaxing imports
or exports but not spending the money at all. In this
case one must consider the rentierbeneficiariesfrom the
ensuing deflation as being the recipients of the taxation
proceeds, and it is the form taken by their additional
purchases that determinesthe effectof the tax.
In insertinga rightangleto represent the government
demand, we have been assuming the proportionsbetween
governmentconsumption of E and G as given. It is
obvious that this is not fixed but will depend upon the
relative prices of E and G. Closely bound up with this
is the implicit assumption that the shapes of the traders'
1 This can be demonstratedwith the help of fig. z. Suppose the g curve to turn down
(since it must be inelastic, otherwiseit is impossible for the proportionof the tax spent on
E (which < i) to be equal to the elasticity)and to pass throughC and U. Draw a straight
line throughC and U, meeting the G axis in M and the E axis in N, and continue UT to
meet OG in L. (This constructionis not shown in the figure.) Then the elasticity of the
offercurve (cf. Lerner," Elasticity of Demand," Review ofEconomic Studies,Oct., 1933, p. 44,
LO TB
and p. 40, fig.5) is = C whichis the proportionof the tax, measured in G which is spent
on E. In this case U, the English traders' equilibrium,will be at the point of intersection
of the offercurves so that they do just the same trade as in the absence of the tax-the
whole of the tax burden falls on the foreigner. If, however,the proportionof the tax spent
on E were greaterthanithis,the price of E would rise relativelyto that of G, the pencil would
swing round to the left,and U would move to a point on e furtherfromthe origin,indicating
that the English traders buy more G and on better terms. The foreignerpays more than
the whole of the tax.
312 ECONOMICA [AUGUST
offercurves(whichincludethe demandfor imports)are

independentof the taxation and the expenditureby the
government.Both of these complicationscan be dealt
withat the same time. The e curvecan be stabilisedby
segregatingall the influences which mightbe considered
to affectit and incorporating themin thegovernment demand
curve. Thisis in accordancewithourprocedure ofincluding
all demand by beneficiaries fromgovernment expenditure
in the government demand.
The government demandcurveis the curveSC in fig.6,
whichis a kindof small replicaof the e curve,something
like the embryoorangethat one findsin a Jaffa. US is
thesize ofthetax measuredin E. At the priceRg-which
is the priceat whichthe government can convertE intoG
-it moves the top end of the rightanglefromS to C.
Instead of insertinga rightanglewe have to insertthe
wedge CSU, movingU down the e curve,SU meanwhile
contracting so as to measurethe same size of pencil,until
the radiant(fromthe origin)passingthroughS meetsthe
government demandcurvejust at the pointwhereit cuts
the g curve.
This is not quite satisfactory in so faras it impliesthat
the shape of SC is independent of the size of the tax col-
lected. An improvement on thisis to considerthereto be
a seriesof SC curves,moreor less parallelto each other
and startingfromdifferent pointson US and US continued.
Each of thesecurvesshowsthe government demandcurve
corresponding to the size of the tax, measuredin E, as
indicatedby the distanceof the bottomof the curvefrom
U along US. This seriesof curvesis then moved down
in the same way untilthe curvewhichbeginsat the point
alongUS corresponding to the size of the tax is in a line
withtheoriginand withthepointwhereit cutstheg curve.
The line throughthese points is Rg and this gives the
equilibriumpositionas shownin fig. 6, the government
consuming CT of G and TU of E.
Fig. 1. Fig. 2.
e e
T 2
O E O~~~~~ E
Fig. 3. Fig. 4.
T~~~~~
0 E O
Fig. 5. Fig. 6.

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Suntory and Toyota International Centres for Economics and Related

The Symmetry between Import and Export Taxes

THis note does not arrive at any conclusionsnot previously

an importand an export tax of such size that the sum of

E and G, we can findthe equilibriumposition by swinging

taxation rightangle would have been a horizontal line

relevant range;1 and converselythat German traders will

offercurves(whichincludethe demandfor imports)are

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