Optimal Tax Design and Enforcement with an Informal Sector

Robin Boadway () and Motohiro Sato ()
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Motohiro Sato: Hitotsubashi University

No 1168, Working Papers from Queen's University, Department of Economics

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 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.

Keywords: informal sector; optimal taxation; value-added tax; trade taxes (search for similar items in EconPapers)
JEL-codes: H21 H26 O17 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-acc, nep-int, nep-pbe and nep-pub
Date: 2008-06
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http://www.econ.queensu.ca/working_papers/papers/qed_wp_1168.pdf First version 2008 (application/pdf)

Related works:
Journal Article: Optimal Tax Design and Enforcement with an Informal Sector (2009)
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Persistent link: http://EconPapers.repec.org/RePEc:qed:wpaper:1168

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