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

The moral obligations of trust

Moral obligation, Darwall argues, is irreducibly second personal. So too, McMyler argues, is the reason for belief supplied by testimony and which supports trust. In this paper, I follow Darwall in arguing that the testimony is not second personal ‘all the way down’. However, I go on to argue, this shows that trust is not fully second personal, which in turn shows that moral obligation is equally not second personal ‘all the way down’