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Optimal Tax Design And Enforcement With An Informal Sector

Author

Listed:
  • Robin Boadway
  • Motohiro Sato

    (Hitotsubashi University)

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.

Suggested Citation

  • Robin Boadway & Motohiro Sato, 2008. "Optimal Tax Design And Enforcement With An Informal Sector," Working Paper 1168, Economics Department, Queen's University.
    • Handle: RePEc:qed:wpaper:1168
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    informal sector; optimal taxation; value-added tax; trade taxes;
    All these keywords.

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements

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