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Fiscal policy and the structure of production in a two-sector developing economy

Listed author(s):
  • Turnovsky, Stephen J.
  • Basher, Md.A.

This paper develops a two-sector model of a developing economy and examines the role of the informal sector in limiting the government's ability to increase tax revenues. A key feature is the introduction of auditing of the informal sector and degree of tax enforcement in that sector. We emphasize the interdependence between tax policy and enforcement in achieving a developing economy's fiscal objectives and show that by judicious policy choices the presence of the informal sector need not hinder its ability to raise tax revenues. We supplement the formal analysis with numerical simulations highlighting the contrasting intertemporal tradeoffs implied by higher tax rates and tax-enforcement levels.

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Article provided by Elsevier in its journal Journal of Development Economics.

Volume (Year): 88 (2009)
Issue (Month): 2 (March)
Pages: 205-216

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Handle: RePEc:eee:deveco:v:88:y:2009:i:2:p:205-216
Contact details of provider: Web page: http://www.elsevier.com/locate/devec

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  18. T.H. Gindling & Katherine Terrell, 2004. "Legal Minimum Wages and the Wages of Formal and Informal Sector Workers in Costa Rica," William Davidson Institute Working Papers Series 2004-647, William Davidson Institute at the University of Michigan.
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