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Puzzling Tax Structures in Devloping Countries: A Comparison of Two Alternative Explanations

In: Fiscal Policy and Management in East Asia, NBER-EASE, Volume 16

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  • Roger Gordon
  • Wei Li

Abstract

Observed economic policies in developing countries differ sharply both from those observed among developed countries and from those forecast by existing models of optimal policies. For example, developing countries rely little on broad-based taxes, and make substantial use of tariffs and seignorage as nontax sources of revenue. The objective of this paper is to contrast the implications of two models designed to explain such anomalous policies. One approach, by Gordon-Li (2005), focuses on the greater difficulties faced in poor countries in monitoring taxable activity, and explores the best available policies given such difficulties. The other, building on Grossman-Helpman (1994), presumes that political-economy problems in developing countries are worse, leading to worse policy choices. The paper compares the contrasting theoretical implications of the two models with the data, and finds that the political-economy approach does poorly in reconciling many aspects of the data with the theory. In contrast, the forecasts from Gordon-Li model are largely consistent with the data currently available.

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This chapter was published in:

  • Takatoshi Ito & Andrew K. Rose, 2007. "Fiscal Policy and Management in East Asia, NBER-EASE, Volume 16," NBER Books, National Bureau of Economic Research, Inc, number ito_07-1, July.
    This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 0365.

    Handle: RePEc:nbr:nberch:0365

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    1. Simeon Djankov & Rafael La Porta & Florencio LopezdeSilanes & Andrei Shleifer, 2000. "The Regulation of Entry," NBER Working Papers 7892, National Bureau of Economic Research, Inc.
    2. Judd, Kenneth L, 1987. "The Welfare Cost of Factor Taxation in a Perfect-Foresight Model," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 95(4), pages 675-709, August.
    3. Beck, T.H.L. & Demirgüç-Kunt, A. & Levine, R., 2000. "A new database on financial development and structure," Open Access publications from Tilburg University urn:nbn:nl:ui:12-3125518, Tilburg University.
    4. Gordon, Roger & Li, Wei, 2009. "Tax structures in developing countries: Many puzzles and a possible explanation," Journal of Public Economics, Elsevier, Elsevier, vol. 93(7-8), pages 855-866, August.
    5. Grossman, G.M. & Helpman, E., 1992. "Protection for Sale," Papers, Princeton, Woodrow Wilson School - Public and International Affairs 162, Princeton, Woodrow Wilson School - Public and International Affairs.
    6. La Porta, Rafael & Lopez-de-Silanes, Florencio & Shleifer, Andrei, 2001. "Government Ownership of Banks," Working Paper Series, Harvard University, John F. Kennedy School of Government rwp01-016, Harvard University, John F. Kennedy School of Government.
    7. Emmanuel Saez, 2000. "The Desirability of Commodity Taxation under Non-Linear Income Taxation and Heterogeneous Tastes," NBER Working Papers 8029, National Bureau of Economic Research, Inc.
    8. Dominik H. Enste & Friedrich Schneider, 2000. "Shadow Economies: Size, Causes, and Consequences," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 38(1), pages 77-114, March.
    9. Peter A. Diamond & J. A. Mirrlees, 1968. "Optimal Taxation and Public Production," Working papers, Massachusetts Institute of Technology (MIT), Department of Economics 22, Massachusetts Institute of Technology (MIT), Department of Economics.
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    Cited by:
    1. Michael M. Alba, 2007. "Comment on "Puzzling Tax Structures in Devloping Countries: A Comparison of Two Alternative Explanations"," NBER Chapters, National Bureau of Economic Research, Inc, in: Fiscal Policy and Management in East Asia, NBER-EASE, Volume 16, pages 37-41 National Bureau of Economic Research, Inc.
    2. Joshua Aizenman & Yothin Jinjarak, 2006. "Globalization and Developing Countries - A Shrinking Tax Base?," NBER Working Papers 11933, National Bureau of Economic Research, Inc.
    3. Knud Jørgen Munk, 2006. "Tax-tariff reform with costs of tax administration," Economics Working Papers, School of Economics and Management, University of Aarhus 2006-14, School of Economics and Management, University of Aarhus.
    4. Daianu, Daniel & Kallai, Ella & Lungu, Laurian, 2012. "Tax Policy under the Curse of Low Revenues: The Case of Romania (Part II)," Journal for Economic Forecasting, Institute for Economic Forecasting, Institute for Economic Forecasting, vol. 0(2), pages 143-162, June.
    5. Richard Arnott, 2008. "Housing policy in developing countries. The importance of the informal economy," Working Papers 200801, University of California at Riverside, Department of Economics, revised Jan 2008.
    6. Daniel M. Hungerman, 2014. "Public Goods, Hidden Income, and Tax Evasion: Some Nonstandard Results from the Warm-Glow Model," NBER Working Papers 19804, National Bureau of Economic Research, Inc.

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