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Limited Tax Capacity and the Optimal Taxation of Firms

Marcelo Arbex () and Enlinson Mattos ()

No 2008, Working Papers from University of Windsor, Department of Economics

Abstract: Limited tax capacity creates evasion opportunities that weakens the production efficiency argument. Motivated by the SIMPLES tax reform in Brazil that led to heterogeneous responses on revenues and production costs of upstream versus downstream informal firms, we characterize the optimal taxation of firms in a limited tax capacity economy to compare with the optimal value-added and turnover taxes. We show that the elasticities of misreported sales and purchase gaps to policy instruments are behavioral statistics that complement the traditional Diamond and Mirrlees (1971)’s mechanical effect of taxation. Numerical results suggest turnover taxes can be welfare enhancing vis-a-vis a value-added system.

Keywords: Optimal firms taxation; limited tax capacity; tax reform. (search for similar items in EconPapers)
JEL-codes: D60 H21 H25 H26 (search for similar items in EconPapers)
Pages: 48 pages
Date: 2020-11
New Economics Papers: this item is included in nep-acc, nep-iue, nep-pbe and nep-pub
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