Tariffs versus VAT in the presence of heterogeneous firms and an informal sector

Ronald B. Davies, Lourenço S. Paz

Research output: Contribution to journalArticle

9 Scopus citations

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. This paper contributes by considering this issue with heterogeneous firms and endogenous entry. This yields two results. First, a cut in the tariff reduces the size of the informal sector. Second, the imposition of VAT need not increase the size of the informal sector. Turning to simulation results, we find that switching from a tariff to a revenue-neutral VAT increases welfare, in part because of the selection effect generated by heterogeneous firms.

Original languageEnglish (US)
Pages (from-to)533-554
Number of pages22
JournalInternational Tax and Public Finance
Volume18
Issue number5
DOIs
StatePublished - Oct 2011

Keywords

  • Firm heterogeneity
  • Informal markets
  • Tariffs
  • Value added tax

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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