VAT, tariffs, and withholding: Border taxes and informality in developing countries
This paper explores the implications of a distinctive feature of the value added tax (VAT) that is stressed by practitioners but has been largely overlooked by theorists: that it functions, in part, as a tax on the purchases of informal operators from formal sector businesses and, not least, on their imports. It also stresses the potential importance of the withholding taxes that are levied by many developing countries -- which have also been ignored. It is shown, in a simple model of informality, that if both of these instruments are optimally deployed then the usual prescription that a small economy should not deploy tariffs remains valid even in the presence of an informal sector; and a simple strategy is established -- generalizing the standard prescription developed in models without informality -- for deploying these instruments so as to preserve government revenue and increase welfare in the face of efficiency-improving tariff cuts. Conditions are established under which a VAT alone is fully optimal, precisely because it is in part a tax on informal sector production. But they are restrictive: in general, an efficient tax structure requires deploying both a VAT and withholding taxes.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- 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.
- Aureo de Paula & Jose A Sheinkman, 2007.
"The Informal Sector,"
122247000000001663, UCLA Department of Economics.
- Aureo de Paula & Jose A. Scheinkman, 2006. "The Informal Sector," Levine's Bibliography 122247000000001030, UCLA Department of Economics.
- Jose Scheinkman & Aureo de Paula, 2007. "The Informal Sector," 2007 Meeting Papers 117, Society for Economic Dynamics.
- Áureo de Paula & José A. Scheinkman, 2007. "The Informal Sector," NBER Working Papers 13486, National Bureau of Economic Research, Inc.
- Aureo de Paula & Jose A. Scheinkman, 2007. "The Informal Sector," PIER Working Paper Archive 07-033, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
- Michael Keen & Jenny E. Ligthart, 2005.
"Coordinating Tariff Reduction and Domestic Tax Reform under Imperfect Competition,"
Review of International Economics,
Wiley Blackwell, vol. 13(2), pages 385-390, 05.
- Keen, M. & Ligthart, J.E., 2004. "Coordinating Tariff Reduction and Domestic Tax Reform under Imperfect Competition," Discussion Paper 2004-78, Tilburg University, Center for Economic Research.
- Keen, M. & Ligthart, J.E., 2005. "Coordinating tariff reduction and domestic tax reform under imperfect competition," Other publications TiSEM db2f2573-0206-4b08-b9ae-c, School of Economics and Management.
- Diamond, Peter A & Mirrlees, James A, 1971. "Optimal Taxation and Public Production: I--Production Efficiency," American Economic Review, American Economic Association, vol. 61(1), pages 8-27, March.
- M. Shahe Emran & Joseph E. Stiglitz, 2002.
"On Selective Indirect Tax Reform in Developing Countries,"
- Emran, M. Shahe & Stiglitz, Joseph E., 2005. "On selective indirect tax reform in developing countries," Journal of Public Economics, Elsevier, vol. 89(4), pages 599-623, April.
- Knud Jørgen Munk, 2006.
"Tax-tariff reform with costs of tax administration,"
Economics Working Papers
2006-14, School of Economics and Management, University of Aarhus.
- Knud Munk, 2008. "Tax-tariff reform with costs of tax administration," International Tax and Public Finance, Springer, vol. 15(6), pages 647-667, December.
- Knud MUNK, . "Tax-Tariff Reform with costs of Tax Administration," Middle East and North Africa 330400045, EcoMod.
- Knud Jørgen Munk, 2005. "Tax-tariff reform with costs of tax administration," Economics Working Papers 2005-21, School of Economics and Management, University of Aarhus.
- Knud Jorgen MUNK, . "Tax-Tariff Reform with Costs of Tax Administrations," EcoMod2004 330600102, EcoMod.
- James E. Anderson, 1997.
"Trade Reform with a Government Budget Constraint,"
Boston College Working Papers in Economics
348., Boston College Department of Economics.
- 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.
- John Piggott & John Whalley, 1998. "VAT Base Broadening, Self Supply, and The Informal Sector," NBER Working Papers 6349, National Bureau of Economic Research, Inc.
- Newbery, David M., 1986. "On the desirability of input taxes," Economics Letters, Elsevier, vol. 20(3), pages 267-270.
- Roger Gordon & Wei Li, 2005.
"Tax Structure in Developing Countries: Many Puzzles and a Possible Explanation,"
NBER Working Papers
11267, National Bureau of Economic Research, Inc.
- 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.
- Michael Keen & Thomas Baunsgaard, 2005.
"Tax Revenue and (or?) Trade Liberalization,"
IMF Working Papers
05/112, International Monetary Fund.
- Michael Keen & Johanna Elisabeth Ligthart, 1999.
"Coordinating Tariff Reduction and Domestic Tax Reform,"
IMF Working Papers
99/93, International Monetary Fund.
- Keen, Michael & Ligthart, Jenny E., 2002. "Coordinating tariff reduction and domestic tax reform," Journal of International Economics, Elsevier, vol. 56(2), pages 489-507, March.
- Keen, Michael & Mintz, Jack, 2004. "The optimal threshold for a value-added tax," Journal of Public Economics, Elsevier, vol. 88(3-4), pages 559-576, March.
- Aureo de Paula & Jose A. Scheinkman, 2007. "The Informal Sector, Second Version," PIER Working Paper Archive 07-035, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 17 Oct 2007.
When requesting a correction, please mention this item's handle: RePEc:eee:pubeco:v:92:y:2008:i:10-11:p:1892-1906. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.