On Selective Indirect Tax Reform in Developing Countries

M. Shahe Emran and Joseph Stiglitz

International Trade from University Library of Munich, Germany

Abstract: The current consensus on indirect tax reform in developing countries favors a reduction in trade taxes with an increase in VAT to raise revenue. The theoretical results on selective reform that underlie this consensus are, however, derived from partial models that ignore the existence of an informal economy. Once the incomplete coverage of VAT due to an informal economy in acknowledged, we show that, contrary to the current consensus, the standard revenue-neutral selective reform of trade taxes and VAT reduces welfare under plausible conditions. Moreover, a VAT base broadening with a revenue-neutral reduction in trade taxes may also reduce welfare. The results raise serious doubts about the wisdom of the widely implemented indirect tax reform in developing countries.

Keywords: Tax Reform; VAT; Trade Tax; Informal Economy; Welfare; Government Revenue (search for similar items in EconPapers)
JEL-codes: F13 H20 (search for similar items in EconPapers)
Date: 2002-10-05
New Economics Papers: this item is included in nep-pbe and nep-pub
Note: Type of Document - Latex; prepared on PC; to print on HP; figures: no figures
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (20)

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Journal Article: On selective indirect tax reform in developing countries (2005)
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Persistent link: https://EconPapers.repec.org/RePEc:wpa:wuwpit:0210003

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