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Taxation and Development (Theories of Government Growth (Demand for public…
Taxation and Development
Summary
Development changes the structure of the economy, and in so doing, it changes the information available to facilitate taxation
- Economic structure in developing countries (especially the large informal sector) creates a very different landscape for taxation
- Tax policies that seem unusual or novel can be optimal responses to the informational constraints faced by the countries
- As countries develop, fiscal capacity grows because formal economic relationships create paper trails that facilitate tax compliance
- Thus, development enables a tax system with more complex and targeted tax burden, and it facilitates the growth of the state (which can be used to fund social insurance)
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Value-Added Taxes (VAT)
- Tax Liability = Tax Rate x (Revenues - Intermediate Goods Cost)
- VAT has a identical base to the retail sales tax (which remits tax on total revenues), but different remittance obligations
Main Concepts:
- Upstream firms in the supply chain provide third-party information on the revenues of downstream firms, allowing for greater enforcement
- Pomeranz (2015): Enforcement effect is transmitted upstream to suppliers of firms in the treatment group. No effect on downstream firms
Limitations:
- Collusion between buyers and sellers
- Small firms are often exempt from VAT due to compliance and administrative costs. This creates weak links in the chain, creates incentive to stay small, and can lead to segmentation of the supply chain
- Last mile problem: Customers do not provide information on retailer revenues