Price Neutral Tax reform With an Informal Economy

Joseph Stiglitz and M. Shahe Emran ()

No 493, Econometric Society 2004 North American Summer Meetings from Econometric Society

Abstract: A Strand of recent literature shows that a reform of import tariff (export tax) and consumption tax (production tax) that keeps consumer (producer) price unchanged cnhances welfare and increases revenue under plausible conditions. We demonstrate that the results derived so far critically depend on the unrealistic assumption that there is no informal sector in the economy, implying that each and every commodity in the economy can be taxed through VAT and production tax. Our results show that, when the feasibility restrictions on the tax instruments imposed by the presence of a large informal and shadow economy is taken into account, such consumer or producer price-neutral reform reduces both revenue and welfare under plausible conditions. The Results add to the emerging skepticism about the desirability of the widely accepted tax reform policies in developing countries that focus on the reduction of trade taxes with coordinated increase in VAT to cover the revenue loss

Keywords: Trade Tax; VAT; Production Tax; Win-win Tax Reform (search for similar items in EconPapers)
JEL-codes: H20 F13 O12 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-pub and nep-reg
Date: 2004-08-11
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Working Paper: Price-neutral Tax Reform With an Informal Economy (2004)
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Persistent link: http://EconPapers.repec.org/RePEc:ecm:nasm04:493

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