Tax-Tariff Reform with Costs of Tax Administration

Abstract

As is broadly recognized, the straightforward application of the Diamond-Mirrlees (1971) production efficiency theorem implies that when lump-sum taxation is not available, then it is optimal for the government in a small open economy to rely on taxes on the net demand of households rather than on border taxes to finance its resource requirements. However, the theorem does not hold when taxation is associated with administrative costs. The present paper explores the implications for optimal taxation and for desirable directions of tax-tariff reform in countries at different levels of economic development, taking into account the costs of tax administration. The paper clarifies the reasons for, and lends support to, the criticism by Emran and Stiglitz (2005) of the IMF and the World Bank's recommendation to developing countries to adopt VAT to replace border taxes.

Direct versus Indirect Taxation: Trends, Theory, and Economic Significance

“…The policy thrust has also been the subject of theoretical criticism. For example, Emran and Stiglitz (2005) have argued that a revenue-neutral shifting from tariff to VAT is welfare worsening because of the existence of a large informal sector in developing countries; Munk (2008) has argued along similar lines because the allocation benefits from domestic taxes may be outweighed by increasing administrative costs. See also Kreickemeier and Raimondos-Moller (2008) on the negative effect on market access and questionable welfare effects.…”

Tax Compliance Costs: A Business-Administration Perspective

“…The complexity of taxation has been a widely discussed subject in the public finance literature (inter alia Kaplow 1996, Munk 2008. From an economic perspective tax complexity can be measured by the costs of the bureaucratic activities in calculating and remitting the tax and social insurance debts to the authorities.…”

Optimal Tax Design and Enforcement with an Informal Sector

“…As in these papers, we also assume that the household sector can be represented by a representative consumer so that all our analysis is based on efficiency considerations. 1 1 An alternative approach is taken by Munk (2005), who models the informal sector as a form of household production. Informal producers purchase inputs from the formal sector and apply some of their own labor to produce output informally.…”