VAT Base Broadening, Self Supply, and The Informal Sector
We develop a general equilibrium tax model to evaluate the impacts of equal yield base broadening in indirect taxes from high rate narrow based (typically manufactures) taxes to broad based taxes (including services) such as a VAT. We capture differences in choice of mode of supply between market goods, such as manufactures, which cannot be supplied other than through the market, and self-suppliable services and informal sector supplied products. Using this formulation, we are able to provide numerical examples of welfare worsening VAT base broadening, which expands the tax base from market based manufactures, in which there are few (or no) non taxed supply possibilities, to all goods and services where such possibilities exist. We show that the usual presumption that there are welfare benefits from equal yield VAT base broadening breaks down once tax induced increases in self supply of previously non taxed goods and services and in informal sector activity (in small scale construction and other areas) are taken into account. Moreover, since untaxed informal sector supply is typically from lower income to higher income households, they gain as comparable informal sector activity is taxed under the base broadening change. We provide a calibrated version of the model, which captures Canadian base broadening accompanying the introduction of the Canadian VAT (GST) in 1990. Results show the change to have been welfare worsening in aggregate but progressive; opposite to conventional belief. Aggregate welfare losses increase sharply if pre-existing income taxes enter the analysis, since VAT induced supply side losses compound with the income tax, while consumption side tax rate variance reducing gains do not
|Date of creation:||Jan 1998|
|Date of revision:|
|Publication status:||published as Piggott, John and John Whalley. "VAT Base Broadening, Self Supply, And The Informal Sector," American Economic Review, 2001, v91(4,Sep), 1084-1094.|
|Contact details of provider:|| Postal: |
Web page: http://www.nber.org
More information through EDIRC
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.:
- Kesselman, Jonathan R., 1989. "Income tax evasion : An intersectoral analysis," Journal of Public Economics, Elsevier, vol. 38(2), pages 137-182, March.
- Angus Deaton, 1979.
"Optimal Taxes and the Structure of Preferences,"
506, Princeton University, Department of Economics, Industrial Relations Section..
- Allingham, Michael G. & Sandmo, Agnar, 1972. "Income tax evasion: a theoretical analysis," Journal of Public Economics, Elsevier, vol. 1(3-4), pages 323-338, November.
- Dawkins, Christina & Srinivasan, T.N. & Whalley, John, 2001. "Calibration," Handbook of Econometrics, in: J.J. Heckman & E.E. Leamer (ed.), Handbook of Econometrics, edition 1, volume 5, chapter 58, pages 3653-3703 Elsevier.
- Lemieux, Thomas & Fortin, Bernard & Frechette, Pierre, 1994. "The Effect of Taxes on Labor Supply in the Underground Economy," American Economic Review, American Economic Association, vol. 84(1), pages 231-54, March.
- Gravelle, Jane G & Kotlikoff, Laurence J, 1989.
"The Incidence and Efficiency Costs of Corporate Taxation When Corporate and Noncorporate Firms Produce the Same Good,"
Journal of Political Economy,
University of Chicago Press, vol. 97(4), pages 749-80, August.
- Jane G. Gravelle & Laurence J. Kotlikoff, 1987. "The Incidence and Efficiency Costs of Corporate Taxation when Corporate and Noncorporate Firms Produce the Same Good," NBER Working Papers 2462, National Bureau of Economic Research, Inc.
- Piggott, John & Whalley, John, 1996.
"The Tax Unit and Household Production,"
Journal of Political Economy,
University of Chicago Press, vol. 104(2), pages 398-418, April.
- Rolf Mirus & Roger S. Smith & Vladimir Karoleff, 1994. "Canada's Underground Economy Revisited: Update and Critique," Canadian Public Policy, University of Toronto Press, vol. 20(3), pages 235-252, September.
- Sadka, Efraim, 1977. "A theorem on uniform taxation," Journal of Public Economics, Elsevier, vol. 7(3), pages 387-391, June.
- Greenwood, J. & Rogerson, R. & Wright, R., 1993. "Household Production in Real Business Cycle Thoery," RCER Working Papers 347, University of Rochester - Center for Economic Research (RCER).
- Jung, Young H. & Snow, Arthur & Trandel, Gregory A., 1994. "Tax evasion and the size of the underground economy," Journal of Public Economics, Elsevier, vol. 54(3), pages 391-402, July.
- repec:cup:cbooks:9780521319867 is not listed on IDEAS
- Browning, Edgar K, 1978. "The Burden of Taxation," Journal of Political Economy, University of Chicago Press, vol. 86(4), pages 649-71, August.
- repec:cup:cbooks:9780521266550 is not listed on IDEAS
- Lars Peter Hansen & James J. Heckman, 1996. "The Empirical Foundations of Calibration," Journal of Economic Perspectives, American Economic Association, vol. 10(1), pages 87-104, Winter.
- Barnett, William A & Lee, Yul W, 1985. "The Global Properties of the Miniflex Laurent, Generalized Leontief, and Translog Flexible Functional Forms," Econometrica, Econometric Society, vol. 53(6), pages 1421-37, November.
- Bob Hamilton & John Whalley, 1989. "Reforming Indirect Taxes in Canada: Some General Equilibrium Estimates," Canadian Journal of Economics, Canadian Economics Association, vol. 22(3), pages 561-75, August.
When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:6349. 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: ()
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.