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Price Neutral Tax reform With an Informal Economy

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  • Joseph E. Stiglitz
  • M. Shahe Emran

Abstract

A 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 Info

Paper provided by Econometric Society in its series Econometric Society 2004 North American Summer Meetings with number 493.

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Date of creation: 11 Aug 2004
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Handle: RePEc:ecm:nasm04:493

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Keywords: Trade Tax; VAT; Production Tax; Win-win Tax Reform;

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References

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  1. James E. Anderson, 1996. "Trade Reform with a Government Budget Constraint," NBER Working Papers 5827, National Bureau of Economic Research, Inc.
  2. John Piggott & John Whalley, 1998. "VAT Base Broadening, Self Supply, and The Informal Sector," NBER Working Papers 6349, National Bureau of Economic Research, Inc.
  3. Keen, Michael & Ligthart, Jenny E., 2002. "Coordinating tariff reduction and domestic tax reform," Journal of International Economics, Elsevier, vol. 56(2), pages 489-507, March.
  4. Dixit, Avinash, 1985. "Tax policy in open economies," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 1, chapter 6, pages 313-374 Elsevier.
  5. Hatta, Tatsuo, 1977. "A Theory of Piecemeal Policy Recommendations," Review of Economic Studies, Wiley Blackwell, vol. 44(1), pages 1-21, February.
  6. Hatzipanayotou, Panos & Michael, Michael S. & Miller, Stephen M., 1994. "Win-win indirect tax reform : A modest proposal," Economics Letters, Elsevier, vol. 44(1-2), pages 147-151.
  7. Emran, M. Shahe, 2005. "Revenue-increasing and welfare-enhancing reform of taxes on exports," Journal of Development Economics, Elsevier, vol. 77(1), pages 277-292, June.
  8. Abe, Kenzo, 1995. "The Target Rates of Tariff and Tax Reform," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 36(4), pages 875-85, November.
  9. Tanzi, Vito & Zee, Howell H., 2000. "Tax Policy for Emerging Markets: Developing Countries," National Tax Journal, National Tax Association, vol. 53(n. 2), pages 299-322, June Cita.
  10. Zee, Howell H., 1996. "Empirics of crosscountry tax revenue comparisons," World Development, Elsevier, vol. 24(10), pages 1659-1671, October.
  11. Burgess, Robin & Stern, Nicholas, 1993. "Taxation and Development," Journal of Economic Literature, American Economic Association, vol. 31(2), pages 762-830, June.
  12. M. Shahe Emran & Joseph E. Stiglitz, 2002. "On Selective Indirect Tax Reform in Developing Countries," International Trade 0210003, EconWPA.
  13. Diewert, W E & Turunen-Red, A H & Woodland, A D, 1989. "Productivity- and Pareto-Improving Changes in Taxes and Tariffs," Review of Economic Studies, Wiley Blackwell, vol. 56(2), pages 199-215, April.
  14. Panagariya, Arvind, 1992. "Input tariffs, duty drawbacks, and tariff reforms," Journal of International Economics, Elsevier, vol. 32(1-2), pages 131-147, February.
  15. Michael, Michael S. & Hatzipanayotou, Panos & Miller, Stephen M., 1993. "Integrated reforms of tariffs and consumption taxes," Journal of Public Economics, Elsevier, vol. 52(3), pages 417-428, October.
  16. Abe, Kenzo, 1992. "Tariff Reform in a Small Open Economy with Public Production," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 33(1), pages 209-22, February.
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Citations

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Cited by:
  1. Emran, M. Shahe & Stiglitz, Joseph E., 2005. "On selective indirect tax reform in developing countries," Journal of Public Economics, Elsevier, vol. 89(4), pages 599-623, April.
  2. Sokolovska, Olena & Sokolovskyi, Dmytro, 2011. "The effect of tax-tariff reform: evidence from Ukraine," MPRA Paper 42643, University Library of Munich, Germany.
  3. Beja, Jr., Edsel, 2009. "The Philippines on debt row," MPRA Paper 16553, University Library of Munich, Germany.
  4. Knud Munk, 2008. "Tax-tariff reform with costs of tax administration," International Tax and Public Finance, Springer, vol. 15(6), pages 647-667, December.
  5. Raghbendra Jha & T. Palanivel, 2007. "Resource Augmentation for Meeting the Millennium Development Goals in the Asia Pacific Region," ASARC Working Papers 2007-02, The Australian National University, Australia South Asia Research Centre.
  6. M. Govinda Rao & R. Kavita Rao, 2005. "Trends and Issues in Tax Policy and Reform in India," India Policy Forum, Global Economy and Development Program, The Brookings Institution, vol. 2(1), pages 55-122.

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