American Economic Journal:
Economic Policy
ISSN 1945-7731 (Print) | ISSN 1945-774X (Online)
Optimal Tax Design and Enforcement with an Informal Sector
American Economic Journal: Economic Policy
vol. 1,
no. 1, February 2009
(pp. 1–27)
Abstract
An optimal commodity tax approach is taken to compare trade taxes and VATs when some commodities are produced informally. Trade taxes apply to all imports and exports, including intermediate goods, while the VAT applies only to sales by the formal sector and imports. The VAT achieves production efficiency within the formal sector, but, unlike trade taxes, cannot indirectly tax profits. Making the size of the informal sector endogenous in each regime is potentially decisive. The ability of the government to change the size of the informal sector through costly enforcement may also tip the balance in favor of the VAT. (JEL E26, H21, H25)Citation
Boadway, Robin, and Motohiro Sato. 2009. "Optimal Tax Design and Enforcement with an Informal Sector." American Economic Journal: Economic Policy, 1 (1): 1–27. DOI: 10.1257/pol.1.1.1JEL Classification
- E26 Informal Economy; Underground Economy
- H21 Taxation and Subsidies: Efficiency; Optimal Taxation
- H25 Business Taxes and Subsidies including sales and value-added (VAT)
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