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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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Citations

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Cited by:
  1. Robin Boadway & Motohiro Sato, 2008. "Optimal Tax Design and Enforcement with an Informal Sector," Working Papers 1168, Queen's University, Department of Economics.
  2. Ligthart, J.E. & Meijden, G.C. van der, 2010. "Coordinated Tax-Tariff Reforms, Informality, and Welfare Distribution," Discussion Paper 2010-61, Tilburg University, Center for Economic Research.
  3. Michael Keen, 2007. "VAT, Tariffs, and withholding," IMF Working Papers 07/174, International Monetary Fund.
  4. 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.
  5. 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.
  6. Eichfelder, Sebastian & Schorn, Michael, 2009. "Tax compliance costs: a business administration perspective," Discussion Papers 2009/3, Free University Berlin, School of Business & Economics.
  7. Michael Keen, 2007. "VAT attacks!," International Tax and Public Finance, Springer, vol. 14(4), pages 365-381, August.
  8. 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.
  9. Květa Kubátová, 2009. "Optimal Taxation – Review of Theory," Český finanční a účetní časopis, University of Economics, Prague, vol. 2009(3), pages 24-36.

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