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Optimal Tax Design and Enforcement with an Informal Sector

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Author Info
Robin Boadway
Motohiro Sato

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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://hdl.handle.net/10.1257/pol.1.1.1
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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

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References listed on IDEAS
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  1. Newbery, David M., 1986. "On the desirability of input taxes," Economics Letters, Elsevier, vol. 20(3), pages 267-270. [Downloadable!] (restricted)
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Cited by:
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  1. Mario Mansour & Michael Keen, 2009. "Revenue Mobilization in Sub-Saharan Africa: Challenges from Globalization," IMF Working Papers 09/157, International Monetary Fund. [Downloadable!]
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This page was last updated on 2009-11-26.

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