On Selective Indirect Tax Reform in Developing Countries

Posted: 25 Apr 2011

See all articles by M. Shahe Emran

M. Shahe Emran

George Washington University - Department of Economics

Joseph E. Stiglitz

Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)

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Date Written: April 21, 2011

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 is 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 indirect tax reform policies pursued by a large number of developing countries.

Suggested Citation

Emran, M. Shahe and Stiglitz, Joseph E., On Selective Indirect Tax Reform in Developing Countries (April 21, 2011). Journal of Public Economics, Vol. 89, No. 4, 2005. Available at SSRN: https://ssrn.com/abstract=1818402

M. Shahe Emran (Contact Author)

George Washington University - Department of Economics ( email )

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Joseph E. Stiglitz

Columbia Business School - Finance and Economics ( email )

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HOME PAGE: http://www.josephstiglitz.com

National Bureau of Economic Research (NBER) ( email )

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