On Selective Indirect Tax Reform in Developing Countries

41 Pages Posted: 22 Oct 2002

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)

Multiple version iconThere are 2 versions of this paper

Date Written: June 2002

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 widely implemented indirect tax reform in developing countries.

Keywords: Tax reform, VAT, Trade tax, Informal economy, Welfare, Government revenue

JEL Classification: F13, H20

Suggested Citation

Emran, M. Shahe and Stiglitz, Joseph E., On Selective Indirect Tax Reform in Developing Countries (June 2002). Available at SSRN: https://ssrn.com/abstract=335660 or http://dx.doi.org/10.2139/ssrn.335660

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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(212) 662-8474 (Fax)

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

National Bureau of Economic Research (NBER) ( email )

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