An optimal commodity tax approach is taken to compare trade taxes
and VATs when some commodities are produced informally. Trade
taxes apply to all imports and exports, including intermediate goods,
while the VAT applies only to sales by the formal sector and imports.
The VAT achieves production efficiency within the formal sector,
but, unlike trade taxes, cannot indirectly tax profits. Making the size
of the informal sector endogenous in each regime is potentially decisive.
The ability of the government to change the size of the informal
sector through costly enforcement may also tip the balance in favor
of the VAT. (JEL E26, H21, H25)
"Optimal Tax Design and Enforcement with an Informal Sector."
American Economic Journal: Economic Policy,
Informal Economy; Underground Economy
Taxation and Subsidies: Efficiency; Optimal Taxation
Business Taxes and Subsidies including sales and value-added (VAT)