Optimal Tax Design and Enforcement with an Informal Sector

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.


Issue Date:
2008-06
Publication Type:
Working or Discussion Paper
Record Identifier:
http://ageconsearch.umn.edu/record/273644
Language:
English
Total Pages:
42
JEL Codes:
H21; H26; O17
Series Statement:
Working Paper No. 1168




 Record created 2018-06-13, last modified 2018-06-14

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