This is a theoretical and empirical study of commercial policy reform in a small open economy. The first part develops a theoretical model and obtains welfare effects of revenueneutral tax reforms and expressions for optimal taxes — trade taxes on final goods and intermediate inputs, and consumption taxes — when tax revenue is used to provide a public good. The second part estimates, for Pakistan, the optimal taxes using the formulae developed in the theoretical part and examine if revenue-neutral tax reforms can be welfare improving. These estimates suggest that there is considerable scope for further reducing tariffs on final goods, but not that on intermediate inputs.