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Limited Tax Capacity and the Optimal Taxation of Firms

Author

Listed:
  • Marcelo Arbex

    (Department of Economics, University of Windsor)

  • Enlinson Mattos

    (São Paulo School of Economics, Getulio Vargas Foundation)

Abstract

Limited tax capacity creates evasion opportunities that weakens the production efficiency argument. Motivated by the SIMPLES tax reform in Brazil that led to heterogeneous responses on revenues and production costs of upstream versus downstream informal firms, we characterize the optimal taxation of firms in a limited tax capacity economy to compare with the optimal value-added and turnover taxes. We show that the elasticities of misreported sales and purchase gaps to policy instruments are behavioral statistics that complement the traditional Diamond and Mirrlees (1971)’s mechanical effect of taxation. Numerical results suggest turnover taxes can be welfare enhancing vis-a-vis a value-added system.

Suggested Citation

  • Marcelo Arbex & Enlinson Mattos, 2020. "Limited Tax Capacity and the Optimal Taxation of Firms," Working Papers 2008, University of Windsor, Department of Economics.
  • Handle: RePEc:wis:wpaper:2008
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    References listed on IDEAS

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    More about this item

    Keywords

    Optimal firms taxation; limited tax capacity; tax reform.;
    All these keywords.

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • D60 - Microeconomics - - Welfare Economics - - - General

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