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On Selective Indirect Tax Reform in Developing Countries

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Author Info
M. Shahe Emran (Stanford University and George Washington University)
Joseph E. Stiglitz (Columbia University)

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Abstract

The current consensus on indirect tax reform in developing countries favors a reduction in trade taxes with an increase in VAT to raise revenue. The theoretical results on selective reform that underlie this consensus are, however, derived from partial models that ignore the existence of an informal economy. Once the incomplete coverage of VAT due to an informal economy in acknowledged, we show that, contrary to the current consensus, the standard revenue-neutral selective reform of trade taxes and VAT reduces welfare under plausible conditions. Moreover, a VAT base broadening with a revenue-neutral reduction in trade taxes may also reduce welfare. The results raise serious doubts about the wisdom of the widely implemented indirect tax reform in developing countries.

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Publisher Info
Paper provided by EconWPA in its series International Trade with number 0210003.

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Date of creation: 05 Oct 2002
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Handle: RePEc:wpa:wuwpit:0210003

Note: Type of Document - Latex; prepared on PC; to print on HP; figures: no figures
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Web page: http://129.3.20.41

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Related research
Keywords: Tax Reform; VAT; Trade Tax; Informal Economy; Welfare; Government Revenue;

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Find related papers by JEL classification:
F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General

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References listed on IDEAS
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    Other versions:
  6. John Piggott & John Whalley, 2001. "VAT Base Broadening, Self Supply, and the Informal Sector," American Economic Review, American Economic Association, vol. 91(4), pages 1084-1094, September. [Downloadable!] (restricted)
    Other versions:
  7. 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. [Downloadable!] (restricted)
  8. M. Shahe Emran & Joseph E. Stiglitz, 2004. "Price-neutral Tax Reform With an Informal Economy," Public Economics 0407010, EconWPA. [Downloadable!]
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  9. 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. [Downloadable!] (restricted)
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  11. 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. [Downloadable!] (restricted)
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  14. Anderson, James E, 2002. "Trade Reform Diagnostics with Many Households, Quotas, and Tariffs," Review of International Economics, Blackwell Publishing, vol. 10(2), pages 215-36, May. [Downloadable!] (restricted)
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  15. Clarete, Ramon L. & Whalley, John, 1987. "Comparing the marginal welfare costs of commodity and trade taxes," Journal of Public Economics, Elsevier, vol. 33(3), pages 357-362, August. [Downloadable!] (restricted)
  16. Newbery, David M., 1986. "On the desirability of input taxes," Economics Letters, Elsevier, vol. 20(3), pages 267-270. [Downloadable!] (restricted)
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  21. Hatta, Tatsuo & Haltiwanger, John, 1986. "Tax Reform and Strong Substitutes," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 27(2), pages 303-15, June. [Downloadable!] (restricted)
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