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Optimal Tax Design and Enforcement with an Informal Sector

  • Robin Boadway

    ()

    (Queen's University)

  • Motohiro Sato

    ()

    (Hitotsubashi University)

An optimal commodity tax approach is taken to compare trade taxes and VATs when some commodities are produced informally. Trade taxes apply to all imports and exports, including intermediate goods while the VAT applies only to sales by the formal sector and imports. The VAT can achieve production efficiency within the formal sector, but unlike the trade tax regime, it cannot indirectly tax pure profits. Making the size of the informal sector endogenous in each regime is potentially decisive. The ability of the government to change the size of the informal sector through costly enforcement may also tip the balance in favor of the VAT.

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File URL: http://qed.econ.queensu.ca/working_papers/papers/qed_wp_1168.pdf
File Function: First version 2008
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Paper provided by Queen's University, Department of Economics in its series Working Papers with number 1168.

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Length: 41 pages
Date of creation: Jun 2008
Date of revision:
Handle: RePEc:qed:wpaper:1168
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  1. 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.
  2. M. Shahe Emran & Joseph E. Stiglitz, 2002. "On Selective Indirect Tax Reform in Developing Countries," International Trade 0210003, EconWPA.
  3. 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.
  4. John Piggott & John Whalley, 1998. "VAT Base Broadening, Self Supply, and The Informal Sector," NBER Working Papers 6349, National Bureau of Economic Research, Inc.
  5. Auriol, Emmanuelle & Warlters, Michael, 2004. "Taxation Base in Developing Countries," IDEI Working Papers 292, Institut d'Économie Industrielle (IDEI), Toulouse.
  6. Newbery, David M., 1986. "On the desirability of input taxes," Economics Letters, Elsevier, vol. 20(3), pages 267-270.
  7. 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.
  8. Michael Keen, 2007. "VAT, Tariffs, and withholding; Border Taxes and Informality in Developing Countries," IMF Working Papers 07/174, International Monetary Fund.
  9. 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.
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