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American Economic Journal: Macroeconomics: Vol. 2 No. 4 (October 2010)

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Value-Added Taxes, Chain Effects, and Informality

Article Citation

de Paula, Áureo, and Jose A. Scheinkman. 2010. "Value-Added Taxes, Chain Effects, and Informality." American Economic Journal: Macroeconomics, 2(4): 195-221.

DOI: 10.1257/mac.2.4.195

Abstract

We present an equilibrium model of tax avoidance and test its implications using a survey of firms in Brazil. In the model, the credit method used to collect value-added tax (VAT) creates informality chains-clients or suppliers of informal firms are more likely to be informal. An increase in enforcement in a production stage increases formality downstream and upstream. Various empirical measures of formality of suppliers and buyers, and of enforcement downstream and upstream, are positively correlated with formality. When the VAT is applied in a single stage of production at a rate estimated by the authorities, these chain effects disappear. (JEL H25, H26, L14, L21, O14, O17)

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Authors

de Paula, Áureo (U PA)
Scheinkman, Jose A. (Princeton U)

JEL Classifications

H25: Business Taxes and Subsidies including sales and value-added (VAT)
H26: Tax Evasion
L14: Transactional Relationships; Contracts and Reputation; Networks
L21: Business Objectives of the Firm
O14: Industrialization; Manufacturing and Service Industries; Choice of Technology
O17: Formal and Informal Sectors; Shadow Economy; Institutional Arrangements

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