On the Use of Border Taxes in Developing Countries

Knud Munk

No 2008005, Discussion Papers (ECON - Département des Sciences Economiques) from Université catholique de Louvain, Département des Sciences Economiques

Abstract: Contrary to what is implied by the so called “Wahsington consensus”, Stiglitz (2003) has argued that in the least developed countries border taxes are superior to VAT. However, supported by much respectable research, the IMF and World Bank’s recommend that developing countries substitute VAT for border taxes. The present paper provides an easy to implement parameterised general equilibrium model which may be used as the basis for empirical research, required to reach a consensus opinion within the profession on the issue. The model allows for the fact that different tax systems are associated with different administrative costs, and represents the informal sector as a parameterisation, the CES-UT, of a utility function with explicit representation of the use of time. By means of a quantitative example, it illustrates, on the one hand, that a large informal sector in itself does not justify the use of border taxes, but, on the other hand, when administrative costs of taxation are taken into account, that the size of the informal sector, as claimed as Stiglitz (2003), is indeed important for whether the use of border taxes is desirable or not.

Keywords: Optimal trade policy; VAT; tax-tariff reform; costs of tax administration; informal sector; developing countries (search for similar items in EconPapers)
JEL-codes: F11 F13 H21 (search for similar items in EconPapers)
Date: 2008-02-01, Revised 2011-07-29
New Economics Papers: this item is included in nep-int and nep-pbe
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Citations: View citations in EconPapers (3)

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Working Paper: On the Use of Border Taxes in Developing Countries (2008)
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