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Tax-tariff reform with costs of tax administration

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  • Knud Jørgen Munk

    ()
    (Department of Economics, University of Aarhus, Denmark)

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

Paper provided by School of Economics and Management, University of Aarhus in its series Economics Working Papers with number 2005-21.

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Length: 20
Date of creation: 15 Dec 2005
Date of revision:
Handle: RePEc:aah:aarhec:2005-21

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Web page: http://www.econ.au.dk/afn/

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Keywords: Optimal taxation; optimal trade policy; VAT; tax-tariff reform; costs of tax administration; informal sector; developing countries;

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References

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  23. Hristos Doucouliagos & Martin Paldam, 2005. "Aid Effectiveness on Growth. A Meta Study," Economics Working Papers 2005-13, School of Economics and Management, University of Aarhus.
  24. Knud Jørgen Munk, 2006. "Welfare Effects of Tax and Price Changes and the CES-UT Utility Function," Economics Working Papers 2006-15, School of Economics and Management, University of Aarhus.
  25. Gardner, Grant W & Kimbrough, Kent P, 1992. "Tax Regimes, Tariff Revenues and Government Spending," Economica, London School of Economics and Political Science, vol. 59(233), pages 75-92, February.
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  32. 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. 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.
  2. 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.
  3. Michael Keen, 2007. "VAT Attacks!," IMF Working Papers 07/142, International Monetary Fund.
  4. Jenny Ligthart & Gerard C. van der Meijden, 2010. "Coordinated Tax-Tariff Reforms, Informality, and Welfare Distribution," CESifo Working Paper Series 3107, CESifo Group Munich.
  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. Michael Keen, 2007. "VAT, Tariffs, and withholding," IMF Working Papers 07/174, International Monetary Fund.
  7. 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.
  8. Květa Kubátová, 2009. "Optimal Taxation – Review of Theory," Český finanční a účetní časopis, University of Economics, Prague, vol. 2009(3), pages 24-36.
  9. Eichfelder, Sebastian & Schorn, Michael, 2009. "Tax compliance costs: a business administration perspective," Discussion Papers 2009/3, Free University Berlin, School of Business & Economics.

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