On the Use of Border Taxes in Developing Countries

Contrary to what is implied by the so called “Wahsington consensus”, Stiglitz (2003) has argued that in the least developed countries border taxes are superior to VAT. However, supported by much respectable research, the IMF and World Bank’s recommend that developing countries substitute VAT for border taxes. The present paper provides an easy to implement parameterised general equilibrium model which may be used as the basis for empirical research, required to reach a consensus opinion within the profession on the issue. The model allows for the fact that different tax systems are associated with different administrative costs, and represents the informal sector as a parameterisation, the CES-UT, of a utility function with explicit representation of the use of time. By means of a quantitative example, it illustrates, on the one hand, that a large informal sector in itself does not justify the use of border taxes, but, on the other hand, when administrative costs of taxation are taken into account, that the size of the informal sector, as claimed as Stiglitz (2003), is indeed important for whether the use of border taxes is desirable or not.Optimal trade policy, VAT, tax-tariff reform, costs of tax administration, informal sector, developing countries

Welfare Effects of Tax and Price Changes Revisited

Dixit’s 1975 paper ‘Welfare Effects of Tax and Price Changes’ cosntitutes a seminal contribution to the theory of tax reform analysis within a second-best general equilibrium framework. The present paper clarifies ambiguities with respect to normalisation which have led to misinterpretation of some Dixit’s analytical results. It proves that a marginal tax reform starting from a proportional tax system will improve social welfare if it increases the supply of labour, whatever the rule of normalisation adopted, and shows that this result provides the key to understanding what determines the optimal system of commodity taxation as reflected in the Corlett and Hague analysis of optimal taxation in an economy with two produced commodities. Recasting work by Deaton (1981b), it generalises, using an alternative definition of the complementarity between consumption and leisure, to an economy with many commodities the insight that the optimal tax system is determined as a trade-off between two objectives : 1) to encourage the supply of labour to the market, and 2) to limit the distorsion of the pattern of consumption of produced commoditie. This insight cannot be illustrated by simulation studies using standard additive separable utility functions. However, extending work of Atkinson and Stern (1080,1981) the paper presents a parameterised utility function with explicit representation of the use of time, the CES-UT, which allows a flexible representation of the relationship between consumption and leisure. This functional form is used to provide a quantitative illustration of the trade-off which defines the optimal tax system and thus desirable directions of tax reform.Public economics, optimal taxation, tax reform, tax simulation, distance functions, CGE models

Welfare Effects of Tax and Price Changes Revisited

Dixit’s 1975 paper "Welfare Effects of Tax and Price Changes " constitutes a seminal contribution to the theory of tax reform analysis within a second-best general equilibrium framework. The present paper clarifies ambiguities with respect to normalisation which have led to misinterpretation of some of Dixit’s analytical results. It proves that a marginal tax reform starting from a proportional tax system will improve social welfare if it increases the supply of labour, whatever the rule of normalisation adopted, and shows that this result provides the key to understanding what determines the optimal system of commodity taxation. This insight cannot be illustrated by simulation studies using standard additive separable utility functions. However, extending work of Atkinson and Stern (1980, 1981) the paper presents a parameterised utility function with explicit representation of the use of time, the CES-UT, which allows a flexible representation of the relationship between consumption and leisure. This functional form is used to provide a quantitative illustration of the trade-off which defines the optimal tax system and thus desirable directions of tax reform. Keywords

Welfare effects of tax and price changes revisited

Dixit’s 1975 paper "Welfare Effects of Tax and Price Changes" constitutes a seminal contribution to the theory of tax reform analysis within a second-best general equilibrium framework. The present paper clarifies ambiguities with respect to normalisation which have led to misinterpretation of some of Dixit’s analytical results. It proves that a marginal tax reform starting from a proportional tax system will improve social welfare if it increases the supply of labour, whatever the rule of normalisation adopted, and shows that this result provides the key to understanding what determines the optimal system of commodity taxation as reflected in the Corlett and Hague analysis of optimal taxation in an economy with two produced commodities. Recasting work by Deaton (1981b), it generalises, using an alternative definition of the complementarity between consumption and leisure, to an economy with many commodities the insight that the optimal tax system is determined as a trade-off between two objectives: 1) to encourage the supply of labour to the market, and 2), to limit the distortion of the pattern of consumption of produced commodities. This insight cannot be illustrated by simulation studies using standard additive separable utility functions. However, extending work of Atkinson and Stern (1980, 1981) the paper presents a parameterised utility function with explicit representation of the use of time, the CES-UT, which allows a flexible representation of the relationship between consumption and leisure. This functional form is used to provide a quantitative illustration of the trade-off which defines the optimal tax system and thus desirable directions of tax reform

Tax-tariff reform with costs of tax administration*

As is broadly recognized, the straightforward application of the DiamondMirrlees (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

On the Use of Border Taxes in Developing Countries

With reference to the size of the informal sector, Stiglitz (2003) has argued, contrary to what is implied by the “Washington consensus”, that in the least developed countries, border taxes are superior to VAT. However, supported by much respectable research, the IMF and World Bank’s recommend that developing countries substitute VAT for border taxes, maintaining that with a VAT there is no justification for the use of border taxes. The present paper provides a simple general equilibrium framework which may be used as the basis for empirical research to settle the dispute. The framework allows for the fact that different tax structures are associated with different administrative costs and represent the informal sector as a parameterisation of household behaviour by a utility function with explicit representation of the use of time, the CES-UT. It illustrates by means of a quantitative example on the one hand, that a large informal sector in itself does not justify the use of border taxes, but on the other hand when administrative costs of taxation are taken into account, that the size of the informal sector is indeed important for whether the use of border taxes is desirable or not

Agricultural reforms in Central and Eastern Europe and the Soviet Union and the implications for their labour markets and for the common agricultural policy of the European Community: final report ; comments on the report by K. J. Munk and response to K. J. Munk by H. Dicke

SIGLEAvailable from Bibliothek des Instituts fuer Weltwirtschaft, ZBW, D-21400 Kiel C 205147 / FIZ - Fachinformationszzentrum Karlsruhe / TIB - Technische InformationsbibliothekDEGerman

Agriculture in the Uruguay Round : ambitions and realities

Les politiques commerciales agricoles sont essentiellement définies sur la base de considérations de politique extérieure qui ont conduit à des niveaux de soutien élevés dans la majorité des pays développés. De nouveaux instruments comme les paiements directs, plus exigeants en termes de coûts d'information mais aux effets moins distordants sur l'allocation des ressources, sont aujourd'hui plus attractifs. Néanmoins, la libéralisation unilatérale est peu vraisemblable. Un commerce plus libre est un bien public qui nécessite une action collective à l'échelle internationale. Les pays qui ont un avantage manifeste à une plus grande libéralisation des échanges peuvent jouer le rôle de catalyseur. Cette logique explique la focalisation du cycle de l'Uruguay sur les intérêts de l'Union européenne et des États-Unis. L'économie politique et les intérêts commerciaux des deux partenaires suggèrent qu'il est possible d'arriver à un accord centré principalement sur les grandes cultures. La principale disposition de cet accord sera la discipline qu'il imposera sur l'utilisation des subventions aux exportations. L'agriculture n'obéira pas entièrement aux règles générales du GATT, mais la politique agricole commune sera plus contrainte par les engagements internationaux qu'elle ne le fut par le passé

Agriculture in the Uruguay Round : ambitions and realities

Les politiques commerciales agricoles sont essentiellement définies sur la base de considérations de politique extérieure qui ont conduit à des niveaux de soutien élevés dans la majorité des pays développés. De nouveaux instruments comme les paiements directs, plus exigeants en termes de coûts d'information mais aux effets moins distordants sur l'allocation des ressources, sont aujourd'hui plus attractifs. Néanmoins, la libéralisation unilatérale est peu vraisemblable. Un commerce plus libre est un bien public qui nécessite une action collective à l'échelle internationale. Les pays qui ont un avantage manifeste à une plus grande libéralisation des échanges peuvent jouer le rôle de catalyseur. Cette logique explique la focalisation du cycle de l'Uruguay sur les intérêts de l'Union européenne et des États-Unis. L'économie politique et les intérêts commerciaux des deux partenaires suggèrent qu'il est possible d'arriver à un accord centré principalement sur les grandes cultures. La principale disposition de cet accord sera la discipline qu'il imposera sur l'utilisation des subventions aux exportations. L'agriculture n'obéira pas entièrement aux règles générales du GATT, mais la politique agricole commune sera plus contrainte par les engagements internationaux qu'elle ne le fut par le passé