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On Selective Indirect Tax Reform in Developing Countries

  • M. Shahe Emran

    (Stanford University and George Washington University)

  • Joseph E. Stiglitz

    (Columbia University)

The current consensus on indirect tax reform in developing countries favors a reduction in trade taxes with an increase in VAT to raise revenue. The theoretical results on selective reform that underlie this consensus are, however, derived from partial models that ignore the existence of an informal economy. Once the incomplete coverage of VAT due to an informal economy in acknowledged, we show that, contrary to the current consensus, the standard revenue-neutral selective reform of trade taxes and VAT reduces welfare under plausible conditions. Moreover, a VAT base broadening with a revenue-neutral reduction in trade taxes may also reduce welfare. The results raise serious doubts about the wisdom of the widely implemented indirect tax reform in developing countries.

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File URL: http://128.118.178.162/eps/it/papers/0210/0210003.pdf
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Paper provided by EconWPA in its series International Trade with number 0210003.

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Date of creation: 05 Oct 2002
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Handle: RePEc:wpa:wuwpit:0210003
Note: Type of Document - Latex; prepared on PC; to print on HP; figures: no figures
Contact details of provider: Web page: http://128.118.178.162

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  1. Partha Dasgupta & Joseph E. Stiglitz, 1972. "Benefit-Cost Analysis and Trade Policies," Cowles Foundation Discussion Papers 340, Cowles Foundation for Research in Economics, Yale University.
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  8. 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.
  9. Hatta, Tatsuo, 1977. "A Theory of Piecemeal Policy Recommendations," Review of Economic Studies, Wiley Blackwell, vol. 44(1), pages 1-21, February.
  10. John Piggott & John Whalley, 1998. "VAT Base Broadening, Self Supply, and The Informal Sector," NBER Working Papers 6349, National Bureau of Economic Research, Inc.
  11. Newbery, David M., 1986. "On the desirability of input taxes," Economics Letters, Elsevier, vol. 20(3), pages 267-270.
  12. M. Shahe Emran & Joseph E. Stiglitz, 2004. "Price-neutral Tax Reform With an Informal Economy," Public Economics 0407010, EconWPA.
  13. Hatzipanayotou, Panos & Michael, Michael S. & Miller, Stephen M., 1994. "Win-win indirect tax reform : A modest proposal," Economics Letters, Elsevier, vol. 44(1-2), pages 147-151.
  14. Gauthier, Bernard & Gersovitz, Mark, 1997. "Revenue erosion through exemption and evasion in Cameroon, 1993," Journal of Public Economics, Elsevier, vol. 64(3), pages 407-424, June.
  15. Dixit, Avinash, 1985. "Tax policy in open economies," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 1, chapter 6, pages 313-374 Elsevier.
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  19. Glenn Jenkins & Rup Khadka, 1998. "Value Added Tax Policy And Implementation In Singapore," Development Discussion Papers 1998-02, JDI Executive Programs.
  20. Anderson, James E, 2002. "Trade Reform Diagnostics with Many Households, Quotas, and Tariffs," Review of International Economics, Wiley Blackwell, vol. 10(2), pages 215-36, May.
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