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Tax-tariff reform with costs of tax administration

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  • Knud Munk

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Abstract

As is broadly recognized, the straightforward application of the Diamond-Mirrlees (1971) production efficiency theorem implies that when lump-sum taxation is not available, then it is optimal for the government in a small open economy to rely on taxes on the net demand of households rather than on border taxes to finance its resource requirements. However, the theorem does not hold when taxation is associated with administrative costs. The present paper explores the implications for optimal taxation and for desirable directions of tax-tariff reform in countries at different levels of economic development taking into account the costs of tax administration. The paper lends support to and clarifies the reasons for the criticism by Emran and Stiglitz (2003, 2005) of the IMF and the World Bank's recommendation to developing countries to adopt VAT to replace border taxes.

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Bibliographic Info

Article provided by Springer in its journal International Tax and Public Finance.

Volume (Year): 15 (2008)
Issue (Month): 6 (December)
Pages: 647-667

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Handle: RePEc:kap:itaxpf:v:15:y:2008:i:6:p:647-667

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Web page: http://www.springerlink.com/link.asp?id=102915

Related research

Keywords: Optimal taxation; Optimal trade policy; VAT; Tax-tariff reform; Costs of tax administration; Informal sector; Developing; F11; F13; H21;

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References

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  1. Baunsgaard, Thomas & Keen, Michael, 2010. "Tax revenue and (or?) trade liberalization," Journal of Public Economics, Elsevier, vol. 94(9-10), pages 563-577, October.
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  6. Hristos Doucouliagos & Martin Paldam, 2009. "The Aid Effectiveness Literature: The Sad Results Of 40 Years Of Research," Journal of Economic Surveys, Wiley Blackwell, vol. 23(3), pages 433-461, 07.
  7. Knud Jørgen Munk & Bo Sandemann Rasmussen, 2005. "On the Determinants of Optimal Border Taxes for a Small Open Economy," Economics Working Papers 2005-22, School of Economics and Management, University of Aarhus.
  8. Anderson, James E, 2002. "Trade Reform Diagnostics with Many Households, Quotas, and Tariffs," Review of International Economics, Wiley Blackwell, vol. 10(2), pages 215-36, May.
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  24. Dominik H. Enste & Friedrich Schneider, 2000. "Shadow Economies: Size, Causes, and Consequences," Journal of Economic Literature, American Economic Association, vol. 38(1), pages 77-114, March.
  25. Knud Jørgen Munk, 2006. "On the Rationale for the Use of Border Taxes in Developing Countries," Economics Working Papers 2006-12, School of Economics and Management, University of Aarhus.
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Citations

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Cited by:
  1. Květa Kubátová, 2009. "Optimal Taxation – Review of Theory," Český finanční a účetní časopis, University of Economics, Prague, vol. 2009(3), pages 24-36.
  2. Paz, Lourenço S., 2014. "The impacts of trade liberalization on informal labor markets: A theoretical and empirical evaluation of the Brazilian case," Journal of International Economics, Elsevier, vol. 92(2), pages 330-348.
  3. Michael Keen, 2007. "VAT attacks!," International Tax and Public Finance, Springer, vol. 14(4), pages 365-381, August.
  4. Paz, Lourenco, 2012. "The impacts of trade liberalization on informal labor markets: an evaluation of the Brazilian case," MPRA Paper 38858, University Library of Munich, Germany.
  5. 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.
  6. Manoj Atolia, 2003. "Public Investment, Tax Evasion and Welfare Effects of a Tariff Reform," Working Papers wp2003_10_01, Department of Economics, Florida State University, revised Oct 2008.
  7. Eichfelder, Sebastian & Schorn, Michael, 2009. "Tax compliance costs: a business administration perspective," Discussion Papers 2009/3, Free University Berlin, School of Business & Economics.
  8. Jenny Ligthart & Gerard C. van der Meijden, 2010. "Coordinated Tax-Tariff Reforms, Informality, and Welfare Distribution," CESifo Working Paper Series 3107, CESifo Group Munich.
  9. Michael Keen, 2007. "VAT, Tariffs, and withholding," IMF Working Papers 07/174, International Monetary Fund.

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