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Optimal tax base with administrative fixed costs

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  • Stéphane Gauthier

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Abstract

This note characterizes the optimal base for commodity taxation in the presence of administrative fixed costs varying across goods. For low tax rates, the optimal base only comprises commodities whose discouragement index is greater than the ratio of their administrative costs to the tax they yield. An illustration with UK data shows that a category of goods should be taxed only if the revenue generated on this category is at least ten times greater than its administrative fixed cost. The cost imputable to the category of goods taxed at the standard rate would be at most 6 percent of total VAT revenue. The administration cost associated with categories of goods currently tax-free could justify exemption. Copyright Springer Science+Business Media New York 2013

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File URL: http://hdl.handle.net/10.1007/s10797-012-9254-8
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Bibliographic Info

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

Volume (Year): 20 (2013)
Issue (Month): 6 (December)
Pages: 961-973

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Handle: RePEc:kap:itaxpf:v:20:y:2013:i:6:p:961-973

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

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Keywords: Indirect taxation; VAT; Tax base; Administrative costs; H21;

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  1. J. A. Mirrlees, 1976. "Optimal Tax Theory: A Synthesis," Working papers 176, Massachusetts Institute of Technology (MIT), Department of Economics.
  2. Wilson, John Douglas, 1989. "On the Optimal Tax Base for Commodity Taxation," American Economic Review, American Economic Association, vol. 79(5), pages 1196-1206, December.
  3. Kaplow, Louis, 1990. "Optimal taxation with costly enforcement and evasion," Journal of Public Economics, Elsevier, vol. 43(2), pages 221-236, November.
  4. Alm, James, 1996. "What Is an "Optimal'"Tax System?," National Tax Journal, National Tax Association, vol. 49(1), pages 117-33, March.
  5. Pascal Belan & Stéphane Gauthier & Guy Laroque, 2008. "Optimal grouping of commodities for indirect taxation," Post-Print hal-00731151, HAL.
  6. Joel Slemrod & Shlomo Yitzhaki, 1996. "The Costs of Taxation and the Marginal Efficiency Cost of Funds," IMF Staff Papers, Palgrave Macmillan, vol. 43(1), pages 172-198, March.
  7. Mayshar, Joram, 1991. " Taxation with Costly Administration," Scandinavian Journal of Economics, Wiley Blackwell, vol. 93(1), pages 75-88.
  8. Yitzhaki, Shlomo, 1979. "A Note on Optimal Taxation and Administrative Costs," American Economic Review, American Economic Association, vol. 69(3), pages 475-80, June.
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