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On the Use of Border Taxes in Developing Countries

  • Knud J., MUNK

Contrary to what is implied by the so called “Wahsington consensus”, Stiglitz (2003) has argued that in the least developed countries border taxes are superior to VAT. However, supported by much respectable research, the IMF and World Bank’s recommend that developing countries substitute VAT for border taxes. The present paper provides an easy to implement parameterised general equilibrium model which may be used as the basis for empirical research, required to reach a consensus opinion within the profession on the issue. The model allows for the fact that different tax systems are associated with different administrative costs, and represents the informal sector as a parameterisation, the CES-UT, of a utility function with explicit representation of the use of time. By means of a quantitative example, it illustrates, on the one hand, that a large informal sector in itself does not justify the use of border taxes, but, on the other hand, when administrative costs of taxation are taken into account, that the size of the informal sector, as claimed as Stiglitz (2003), is indeed important for whether the use of border taxes is desirable or not.

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Paper provided by Université catholique de Louvain, Département des Sciences Economiques in its series Discussion Papers (ECON - Département des Sciences Economiques) with number 2008005.

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Date of creation: 01 Feb 2008
Date of revision: 29 Jul 2011
Handle: RePEc:ctl:louvec:2008005
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  1. Knud Munk, 2008. "Tax-tariff reform with costs of tax administration," International Tax and Public Finance, Springer, vol. 15(6), pages 647-667, December.
  2. Knud J., MUNK, 2008. "Welfare Effects of Tax and Price Changes Revisited," Discussion Papers (ECON - Département des Sciences Economiques) 2008006, Université catholique de Louvain, Département des Sciences Economiques.
  3. Gardner, Grant W & Kimbrough, Kent P, 1992. "Tax Regimes, Tariff Revenues and Government Spending," Economica, London School of Economics and Political Science, vol. 59(233), pages 75-92, February.
  4. 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.
  5. 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.
  6. Munk, Knud Jorgen, 1980. "Optimal Taxation with Some Non-Taxable Commodities," Review of Economic Studies, Wiley Blackwell, vol. 47(4), pages 755-65, July.
  7. Knud Munk, 1998. "Optimal Support to Low-skilled Households," Center for Economic Studies - Discussion papers ces9827, Katholieke Universiteit Leuven, Centrum voor Economische Studiën.
  8. Munk, Knud Jorgen, 1978. " Optimal Taxation and Pure Profit," Scandinavian Journal of Economics, Wiley Blackwell, vol. 80(1), pages 1-19.
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