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Optimal Tax Design and Enforcement with an Informal Sector

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  • Robin Boadway
  • Motohiro Sato

Abstract

An optimal commodity tax approach is taken to compare trade taxes and VATs when some commodities are produced informally. Trade taxes apply to all imports and exports, including intermediate goods, while the VAT applies only to sales by the formal sector and imports. The VAT achieves production efficiency within the formal sector, but, unlike trade taxes, cannot indirectly tax profits. Making the size of the informal sector endogenous in each regime is potentially decisive. The ability of the government to change the size of the informal sector through costly enforcement may also tip the balance in favor of the VAT. (JEL E26, H21, H25)

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/pol.1.1.1
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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Journal: Economic Policy.

Volume (Year): 1 (2009)
Issue (Month): 1 (February)
Pages: 1-27

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Handle: RePEc:aea:aejpol:v:1:y:2009:i:1:p:1-27

Note: DOI: 10.1257/pol.1.1.1
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References

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  1. Emran, M. Shahe & Stiglitz, Joseph E., 2005. "On selective indirect tax reform in developing countries," Journal of Public Economics, Elsevier, vol. 89(4), pages 599-623, April.
  2. John Piggott & John Whalley, 1998. "VAT Base Broadening, Self Supply, and The Informal Sector," NBER Working Papers 6349, National Bureau of Economic Research, Inc.
  3. Michael Keen & Johanna Elisabeth Ligthart, 1999. "Coordinating Tariff Reduction and Domestic Tax Reform," IMF Working Papers 99/93, International Monetary Fund.
  4. Gordon, Roger & Li, Wei, 2009. "Tax structures in developing countries: Many puzzles and a possible explanation," Journal of Public Economics, Elsevier, vol. 93(7-8), pages 855-866, August.
  5. Auriol, Emmanuelle & Warlters, Michael, 2005. "Taxation base in developing countries," Journal of Public Economics, Elsevier, vol. 89(4), pages 625-646, April.
  6. Keen, Michael & Mintz, Jack, 2004. "The optimal threshold for a value-added tax," Journal of Public Economics, Elsevier, vol. 88(3-4), pages 559-576, March.
  7. Knud Jørgen Munk, 2005. "Tax-tariff reform with costs of tax administration," Economics Working Papers 2005-21, School of Economics and Management, University of Aarhus.
  8. Keen, Michael, 2008. "VAT, tariffs, and withholding: Border taxes and informality in developing countries," Journal of Public Economics, Elsevier, vol. 92(10-11), pages 1892-1906, October.
  9. Newbery, David M., 1986. "On the desirability of input taxes," Economics Letters, Elsevier, vol. 20(3), pages 267-270.
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Citations

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Cited by:
  1. Richard M. Bird & Michael Smart, 2012. "Financing Social Expenditures in Developing Countries: Payroll or Value Added Taxes?," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper1206, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
  2. Jenny Ligthart & Gerard C. van der Meijden, 2010. "Coordinated Tax-Tari Reforms, Informality, and Welfare Distribution," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper1029, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
  3. Paul E. Carrillo & M. Shahe Emran & Gabriela Aparicio, 2011. "Taxes, Prisons, and CFOs: The Effects of Increased Punishment on Corporate Tax Compliance in Ecuador," Working Papers 2011-02, The George Washington University, Institute for International Economic Policy.
  4. Michael S. Michael & Sajal Lahiri & Panos Hatzipanayotou, 2008. "Integrated Reforms of Indirect Taxes in the Presence of Pollution," CESifo Working Paper Series 2276, CESifo Group Munich.
  5. Mario Mansour & Michael Keen, 2009. "Revenue Mobilization in Sub-Saharan Africa," IMF Working Papers 09/157, International Monetary Fund.
  6. Ronald Davies & Lourenço Paz, 2011. "Tariffs versus VAT in the presence of heterogeneous firms and an informal sector," International Tax and Public Finance, Springer, vol. 18(5), pages 533-554, October.
  7. Baunsgaard, Thomas & Keen, Michael, 2010. "Tax revenue and (or?) trade liberalization," Journal of Public Economics, Elsevier, vol. 94(9-10), pages 563-577, October.
  8. Agnar Sandmo, 2012. "An evasive topic: theorizing about the hidden economy," International Tax and Public Finance, Springer, vol. 19(1), pages 5-24, February.
  9. Alstadsæter, Annette & Jacob, Martin, 2013. "The effect of awareness and incentives on tax evasion," arqus Discussion Papers in Quantitative Tax Research 147, arqus - Arbeitskreis Quantitative Steuerlehre.
  10. Michael S. Michael & Sajal Lahiri & Panos Hatzipanayotou, 2013. "Piecemeal Reform of Domestic Indirect Taxes toward Uniformity in the Presence of Pollution: with and without a Revenue Constraint," University of Cyprus Working Papers in Economics 03-2013, University of Cyprus Department of Economics.
  11. Michael Keen, 2009. "What Do (and Don't) We Know about the Value Added Tax? A Review of Richard M. Bird and Pierre-Pascal Gendron's The VAT in Developing and Transitional Countries," Journal of Economic Literature, American Economic Association, vol. 47(1), pages 159-70, March.
  12. Panos Hatzipanayotou & Sajal Lahiri & Michael Michael, 2011. "Trade and domestic tax reforms in the presence of a public good and different neutrality conditions," International Tax and Public Finance, Springer, vol. 18(3), pages 273-290, June.
  13. Paul E. Carrillo & M. Shahe Emran & Anita Rivadeneira, 2011. "Do Cheaters Bunch Together? Profit Taxes, Withholding Rates and Tax Evasion," Working Papers 2011-03, The George Washington University, Institute for International Economic Policy.
  14. Michael S. Michael & Panos Hatzipanayotou, 2013. "Cooperative and Non-Cooperative Equilibrium Consumption Taxes in the Presence of Cross-Border Pollution," CESifo Working Paper Series 4501, CESifo Group Munich.

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