Price Neutral Tax reform With an Informal Economy
AbstractA Strand of recent literature shows that a reform of import tariff (export tax) and consumption tax (production tax) that keeps consumer (producer) price unchanged cnhances welfare and increases revenue under plausible conditions. We demonstrate that the results derived so far critically depend on the unrealistic assumption that there is no informal sector in the economy, implying that each and every commodity in the economy can be taxed through VAT and production tax. Our results show that, when the feasibility restrictions on the tax instruments imposed by the presence of a large informal and shadow economy is taken into account, such consumer or producer price-neutral reform reduces both revenue and welfare under plausible conditions. The Results add to the emerging skepticism about the desirability of the widely accepted tax reform policies in developing countries that focus on the reduction of trade taxes with coordinated increase in VAT to cover the revenue loss
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Bibliographic InfoPaper provided by Econometric Society in its series Econometric Society 2004 North American Summer Meetings with number 493.
Date of creation: 11 Aug 2004
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Trade Tax; VAT; Production Tax; Win-win Tax Reform;
Other versions of this item:
- H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
- F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
- O12 - Economic Development, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development
This paper has been announced in the following NEP Reports:
- NEP-ALL-2004-10-30 (All new papers)
- NEP-PUB-2004-11-22 (Public Finance)
- NEP-REG-2004-10-30 (Regulation)
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