Tax policy and the missing middle: Optimal tax remittance with firm-level administrative costs
We analyze the optimal taxation of firms when the government faces fixed (per-firm) administrative costs of tax collection. The tax instruments at the government's disposal are a fixed (per-firm) fee and a linear tax on output. If all firms in an industry are taxed, we show that it is optimal to impose a positive fee to internalize administrative costs. The output taxes satisfy the inverse elasticity rule for taxed industries, but industries with sufficiently high administrative costs should be exempted from taxation. We also investigate the case where firms with outputs below a cutoff level can be exempted from taxation. It may be optimal to set the cutoff high enough to exempt a sizable number of firms, even though some firms reduce their outputs to the cutoff level, creating a “missing middle”: small and large firms – but not those of intermediate size – exist. Thus, this common phenomenon in developing countries may result from optimal policies. The paper also presents a modified inverse-elasticity rule when output cutoffs are used, and it extends the analysis to include optimal nonlinear taxes on output.
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.
When requesting a correction, please mention this item's handle: RePEc:eee:pubeco:v:95:y:2011:i:9:p:1036-1047. 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.