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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)

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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File URL: http://128.118.178.162/eps/it/papers/0210/0210003.pdf
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Bibliographic 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://128.118.178.162

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

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