Puzzling Tax Structures in Developing Countries: A Comparison of Two Alternative Explanations

Roger Gordon and Wei Li

No 11661, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Observed economic policies in developing countries differ sharply both from those observed among developed countries and from those forecast by existing models of optimal policies. For example, developing countries rely little on broad-based taxes, and make substantial use of tariffs and seignorage as nontax sources of revenue. The objective of this paper is to contrast the implications of two models designed to explain such anomalous policies. One approach, by Gordon-Li (2005), focuses on the greater difficulties faced in poor countries in monitoring taxable activity, and explores the best available policies given such difficulties. The other, building on Grossman-Helpman (1994), presumes that political-economy problems in developing countries are worse, leading to worse policy choices. The paper compares the contrasting theoretical implications of the two models with the data, and finds that the political-economy approach does poorly in reconciling many aspects of the data with the theory. In contrast, the forecasts from Gordon-Li model are largely consistent with the data currently available.

JEL-codes: F13 F23 H21 O17 O23 (search for similar items in EconPapers)
Date: 2005-10
New Economics Papers: this item is included in nep-cwa, nep-dev, nep-lam, nep-pbe, nep-pol and nep-pub
Note: PE
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Citations: View citations in EconPapers (12)

Published as Ito, Takatoshi and Andrew K. Rose. Fiscal Policy and Management in East Asia, NBER-East Asia Seminar on Economics series, vol 16. Chicago and London: University of Chicago Press, 2007.
Published as Puzzling Tax Structures in Devloping Countries: A Comparison of Two Alternative Explanations , Roger Gordon, Wei Li. in Fiscal Policy and Management in East Asia , Ito and Rose. 2007

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Chapter: Puzzling Tax Structures in Devloping Countries: A Comparison of Two Alternative Explanations (2007)
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