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Optimal Tax Design and Enforcement with an Informal Sector

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Author Info
Robin Boadway () (Queen's University)
Motohiro Sato () (Hitotsubashi University)

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Abstract

An optimal commodity tax approach is taken to compare trade taxes and VATs when some commodities are produced informally. Trade taxes apply to all imports and exports, including intermediate goods while the VAT applies only to sales by the formal sector and imports. The VAT can achieve production efficiency within the formal sector, but unlike the trade tax regime, it cannot indirectly tax pure profits. Making the size of the informal sector endogenous in each regime is potentially decisive. The ability of the government to change the size of the informal sector through costly enforcement may also tip the balance in favor of the VAT.

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File URL: http://www.econ.queensu.ca/working_papers/papers/qed_wp_1168.pdf
File Format: application/pdf
File Function: First version 2008
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Publisher Info
Paper provided by Queen's University, Department of Economics in its series Working Papers with number 1168.

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Length: 41 pages
Date of creation: Jun 2008
Date of revision:
Handle: RePEc:qed:wpaper:1168

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Related research
Keywords: informal sector optimal taxation value-added tax trade taxes

Find related papers by JEL classification:
H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion
O17 - Economic Development, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements

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This page was last updated on 2008-11-13.


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