Optimal Tax Design and Enforcement with an Informal Sector

Robin Boadway · Motohiro Sato

105 citations0/0 files storedAmerican Economic Journal Economic Policy

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Taxation and Compliance Studies Economic and Fiscal Studies Fiscal Policy and Economic Growth

Abstract

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 achieves production efficiency within the formal sector, but, unlike trade taxes, cannot indirectly tax 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. (JEL E26, H21, H25)

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References

1982Lectures in Public Economics.2005Tax Revenue and (or?) Trade Liberalization 2004On selective indirect tax reform in developing countries 2001The Modern VAT 2002The optimal elasticity of taxable income 2001Taxation and Economic Efficiency 2004Taxation base in developing countries 2007The Informal Sector

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