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Tariffs Versus VAT in the presence of heterogeneous firms and an informal sector
Author(s)
Date Issued
2010-04-05
Date Available
2010-12-09T15:15:50Z
Abstract
The debate over the use of tariffs or value added taxes in developing countries has
focused on the difficulty of collecting VAT from the informal sector of the economy. This
paper contributes by considering this issue with heterogeneous firms and endogenous
entry. This yields two new results. First, a cut in the tariff in and of itself can reduce
the size of the informal sector. Second, the imposition of a VAT need not increase the
number of informal firms. In fact, for many parameterizations of the model, higher
VAT reduces informality. Despite this, whether a revenue neutral shift from tariffs to VAT increases or decreases welfare depends on the parametrization. Therefore while this move may be welfare improving in some cases, it is not a one-size fits all policy.
Sponsorship
Not applicable
Type of Material
Working Paper
Publisher
University College Dublin. School of Economics
Series
UCD Centre for Economic Research Working Paper Series
WP 10 08
Subject – LCSH
Tariff
Value-added tax
Informal sector (Economics)--Taxation
Web versions
Language
English
Status of Item
Not peer reviewed
This item is made available under a Creative Commons License
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