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Tax-tariff reform with costs of tax administration

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  • Knud Jørgen Munk

    ()
    (School of Economics and Management, 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 of taking into account the costs of tax administration for optimal taxation and for desirable directions of tax-tariff reform in countries at different levels of economic development. The paper clarifies the reasons for, and lends support to, the criticism by Stiglitz (2003) 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 2006-14.

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Length: 21
Date of creation: 30 Dec 2006
Date of revision:
Handle: RePEc:aah:aarhec:2006-14

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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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Citations

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Cited by:
  1. Paz, Lourenco, 2012. "The effect of trade liberalization on payroll tax evasion and labor informality," MPRA Paper 39545, University Library of Munich, Germany.
  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. Robin Boadway & Motohiro Sato, 2008. "Optimal Tax Design and Enforcement with an Informal Sector," Working Papers 1168, Queen's University, Department of Economics.
  4. Květa Kubátová, 2009. "Optimal Taxation – Review of Theory," Český finanční a účetní časopis, University of Economics, Prague, vol. 2009(3), pages 24-36.
  5. Jenny Ligthart & Gerard C. van der Meijden, 2010. "Coordinated Tax-Tariff Reforms, Informality, and Welfare Distribution," CESifo Working Paper Series 3107, CESifo Group Munich.
  6. Michael Keen, 2007. "VAT attacks!," International Tax and Public Finance, Springer, vol. 14(4), pages 365-381, August.
  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. 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. Michael Keen, 2007. "VAT, Tariffs, and withholding," IMF Working Papers 07/174, International Monetary Fund.

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