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Indirect Tax Reform in Developing Countries: A Consumption-Neutral Approach

Author

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  • Haibara Takumi

    (Faculty of Economics, Aichi University, 4-60-6 Hiraike-cho, Nakamura-ku, Nagoya, Aichi 453-8777, Japan, Tel: +81-52-564-6128, Fax: +81-52-564-6228)

Abstract

M. Shahe Emran and Joseph E. Stiglitz [Emran, M. S., and J. E. Stiglitz. 2005. “On Selective Indirect Tax Reform in Developing Countries.” Journal of Public Economics 89: 599–623] demonstrate that a revenue-neutral indirect tax reform, in which value-added tax (VAT) is increased to compensate for any revenue loss from tariff cuts, reduces welfare because of the strong substitutability in consumption between formal and informal commodities. This paper reconsiders this result, showing that indirect tax reform, if designed in a consumption-neutral fashion, improves welfare, even under strong substitutability, and discusses the revenue and distributional implications of the proposed reform.

Suggested Citation

  • Haibara Takumi, 2017. "Indirect Tax Reform in Developing Countries: A Consumption-Neutral Approach," Journal of Globalization and Development, De Gruyter, vol. 8(1), pages 1-11, June.
    • Handle: RePEc:bpj:globdv:v:8:y:2017:i:1:p:11:n:2
    DOI: 10.1515/jgd-2016-0036
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    References listed on IDEAS

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    1. Robin Boadway & Motohiro Sato, 2009. "Optimal Tax Design and Enforcement with an Informal Sector," American Economic Journal: Economic Policy, American Economic Association, vol. 1(1), pages 1-27, February.
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    More about this item

    Keywords

    consumption neutrality; indirect tax reform; informal economy; revenue neutrality;
    All these keywords.

    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements

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