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Tax-tariff reform with costs of tax administration

  • Knud Jørgen Munk

    ()

    (School of Economics and Management, University of Aarhus, Denmark)

As is broadly recognized, the straightforward application of the Diamond-Mirrlees (1971) production efficiency theorem implies that when lump-sum taxation is not available, then it is optimal for the government in a small open economy to rely on taxes on the net demand of households rather than on border taxes to finance its resource requirements. However, the theorem does not hold when taxation is associated with administrative costs. The present paper explores the implications of taking into account the costs of tax administration for optimal taxation and for desirable directions of tax-tariff reform in countries at different levels of economic development. The paper clarifies the reasons for, and lends support to, the criticism by Stiglitz (2003) of the IMF and the World Bank's recommendation to developing countries to adopt VAT to replace border taxes.

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Paper provided by School of Economics and Management, University of Aarhus in its series Economics Working Papers with number 2006-14.

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Length: 21
Date of creation: 30 Dec 2006
Date of revision:
Handle: RePEc:aah:aarhec:2006-14
Contact details of provider: Web page: http://www.econ.au.dk/afn/

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  19. Knud Jørgen Munk, 2006. "Welfare Effects of Tax and Price Changes and the CES-UT Utility Function," Economics Working Papers 2006-15, School of Economics and Management, University of Aarhus.
  20. Knud Jørgen Munk, 2006. "On the Rationale for the Use of Border Taxes in Developing Countries," Economics Working Papers 2006-12, School of Economics and Management, University of Aarhus.
  21. Diewert, W E & Turunen-Red, A H & Woodland, A D, 1989. "Productivity- and Pareto-Improving Changes in Taxes and Tariffs," Review of Economic Studies, Wiley Blackwell, vol. 56(2), pages 199-215, April.
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  29. Munk, Knud Jorgen, 1980. "Optimal Taxation with Some Non-Taxable Commodities," Review of Economic Studies, Wiley Blackwell, vol. 47(4), pages 755-65, July.
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  31. Knud Jørgen Munk, . "What Determines the Optimal Commodity Tax Structure from an Intuitive Point of View?," EPRU Working Paper Series 02-17, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
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  34. Knud Jørgen Munk & Bo Sandemann Rasmussen, 2005. "On the Determinants of Optimal Border Taxes for a Small Open Economy," Economics Working Papers 2005-22, School of Economics and Management, University of Aarhus.
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