Indirect Tax Reform in Developing Countries: A Consumption-Neutral Approach

Haibara Takumi ()
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Haibara Takumi: Faculty of Economics, Aichi University, 4-60-6 Hiraike-cho, Nakamura-ku, Nagoya, Aichi 453-8777, Japan, Tel: +81-52-564-6128, Fax: +81-52-564-6228

Journal of Globalization and Development, 2017, vol. 8, issue 1, 11

Abstract: M. Shahe Emran and Joseph E. Stiglitz [Emran, M. S., and J. E. Stiglitz. 2005. “On Selective Indirect Tax Reform in Developing Countries.” Journal of Public Economics 89: 599–623] demonstrate that a revenue-neutral indirect tax reform, in which value-added tax (VAT) is increased to compensate for any revenue loss from tariff cuts, reduces welfare because of the strong substitutability in consumption between formal and informal commodities. This paper reconsiders this result, showing that indirect tax reform, if designed in a consumption-neutral fashion, improves welfare, even under strong substitutability, and discusses the revenue and distributional implications of the proposed reform.

Keywords: consumption neutrality; indirect tax reform; informal economy; revenue neutrality (search for similar items in EconPapers)
JEL-codes: F13 H20 O17 (search for similar items in EconPapers)
Date: 2017
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DOI: 10.1515/jgd-2016-0036

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