Taxation base in developing countries

Abstract

Informal sectors are larger in developing countries than in rich countries. This is a result of higher fixed costs of entry into the formal economy in developing countries. We show that raising barriers to entry is consistent with a deliberate government policy for raising tax revenue. By generating market power, and hence rents, for the permitted entrants, market entry fees foster the emergence of large taxpayers. The rents can be readily confiscated by the government through entry fees and taxes on profits at a low administrative cost. The relevance of the theory is assessed with a sample of 64 countries. Empirical analysis supports the results of the paper. JEL Classification Numbers: D43, H25, H26, H32, H60 * We are extremely grateful to the participants at the Cornell/ISPE Conference on Public Finance and Development (September 2001) for the comments, critics and suggestions they made on a preliminary version of the paper. The friendly atmosphere and the stimulating discussions of the conference were of great help to us. We are indebted to Hiranya Mukhopadhyay and Benjamin F. Jones for their discussion of the paper. We are extremely grateful to Alban Thomas and Stéphane Straub for comments and advice. Finally we would like to thank two anonymous referees and the two associated editors of this issue for their thorough comments. All remaining errors are ours.

An Anti-Austerity Policy Recipe Against Debt Accumulation in the Presence of Hidden Economy

“…(Friedman et al, 2000). 4 For example, Auriol and Michael (2005) document for 64 developing countries that raising barriers to entry in the official economy is consistent with a deliberate and successful government policy for raising tax revenue. See also note 3.…”

Informality: the Doorstep of the Legal System

“…The rst fact has been extensively documented by Djankov, LaPorta, Lopez de-Silanes and Shleifer (2002), who built a data set that identi es all the business start-up costs for a large cross section of countries. Using the same data, Auriol and Warlters (2005) similarly report a positive and signi cant e ect of start-up costs on the size of the informal economy. In a more recent contribution, Estrin and Mickiewicz (2012) study the relationship between entry and the size of the informal economy empirically.…”

Tax Policy and the Missing Middle: Optimal Tax Remittance with Firm-Level Administrative Costs

“…In particular, we characterize the optimal system of output taxes and fixed fees, and we derive a rule to determine when administrative costs are sufficiently high to justify the exemption of an industry from taxation. After 7 Auriol and Warlters (2005) also argue that entry barriers may be optimal in some circumstances, but their mechanism is very different: the entry barriers generate rents for incumbents that the government can tax. 8 International Tax Dialogue (2007, p. 31) discusses the fixed per-firm fee, also known as a patente system, as an example of a presumptive tax regime.…”