Value-Added Taxes, Chain Effects, and Informality

Aureo de Paula and Jose Scheinkman

American Economic Journal: Macroeconomics, 2010, vol. 2, issue 4, 195-221

Abstract: We present an equilibrium model of tax avoidance and test its implications using a survey of firms in Brazil. In the model, the credit method used to collect value-added tax (VAT) creates informality chains-clients or suppliers of informal firms are more likely to be informal. An increase in enforcement in a production stage increases formality downstream and upstream. Various empirical measures of formality of suppliers and buyers, and of enforcement downstream and upstream, are positively correlated with formality. When the VAT is applied in a single stage of production at a rate estimated by the authorities, these chain effects disappear. (JEL H25, H26, L14, L21, O14, O17)

JEL-codes: H25 H26 L14 L21 O14 O17 (search for similar items in EconPapers)
Date: 2010
Note: DOI: 10.1257/mac.2.4.195
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Citations: View citations in EconPapers (127)

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