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Taxing Hard-to-Tax Markets

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  • Marcelo Arbex

    ()
    (Department of Economics, University of Windsor)

  • Enlinson Mattos

    ()
    (São Paulo School of Economics, Getulio Vargas Foundation)

  • Laudo M. Ogura

    ()
    (Economics Department, Grand Valley State University)

Abstract

Tax enforcement costs constrain the government?s ability to observe economic transactions, giving rise to hard-to-tax (HTT) markets. In these markets transactions are untaxed and consumers are better off than in taxed markets. This paper studies a novel approach to combat evasion in HTT markets: consumer auditing, which rewards consumers for requesting transaction receipts. We develop a Hotelling-type spatial model of sales taxation to analyze the welfare and distributional effects of the implementation of this policy. We find that consumer auditing allows for a lower tax rate and greater provision of the public good in the economy. We show that this policy not only can enhance welfare, but also equalize utilities of consumers across markets.

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File URL: http://web2.uwindsor.ca/economics/RePEc/wis/pdf/1305.pdf
File Function: First version, 2013
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Bibliographic Info

Paper provided by University of Windsor, Department of Economics in its series Working Papers with number 1305.

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Length: 18 pages
Date of creation: Aug 2013
Date of revision:
Handle: RePEc:wis:wpaper:1305

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Keywords: taxation; hard-to-tax; tax evasion.;

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  1. Robin Boadway & Nicolas Marceau & Steeve Mongrain, 2007. "Redistributive Taxation under Ethical Behaviour," Scandinavian Journal of Economics, Wiley Blackwell, vol. 109(3), pages 505-529, 09.
  2. Marchese, Carla, 2006. "Rewarding the consumer for curbing the evasion of commodity taxes?," POLIS Working Papers, Institute of Public Policy and Public Choice - POLIS 72, Institute of Public Policy and Public Choice - POLIS.
  3. Gordon, Roger & Li, Wei, 2009. "Tax structures in developing countries: Many puzzles and a possible explanation," Journal of Public Economics, Elsevier, vol. 93(7-8), pages 855-866, August.
  4. Juin-jen Chang & Ching-chong Lai, 2004. "Collaborative tax evasion and social norms: why deterrence does not work," Oxford Economic Papers, Oxford University Press, vol. 56(2), pages 344-368, April.
  5. Das-Gupta, Arindam, 1994. "A Theory of Hard-to-Tax Groups," Public Finance = Finances publiques, , , vol. 49(Supplemen), pages 28-39.
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