Chapter

Puzzling Tax Structures in Developing Countries

Roger Gordon and Wei Li

in Fiscal Policy and Management in East Asia

Published by University of Chicago Press

Published in print November 2007 | ISBN: 9780226386812
Published online February 2013 | e-ISBN: 9780226387062 | DOI: http://dx.doi.org/10.7208/chicago/9780226387062.003.0002
Puzzling Tax Structures in Developing Countries

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Economic policies in developing countries often differ sharply from those commonly advocated by economists, generating advice to adopt policies more consistent with both the successful practices in richer countries and/or those that appear best based on existing economic theories. Taxes certainly require some interference with market transactions, so the advice would be to enact them with a broad base and low rates so as to lessen the efficiency costs resulting from the distortions created by the tax structure. Broad-based taxes, such as a value-added tax, certainly do play an important role in poorer as well as richer countries. However, a much larger share of revenue in developing than in developed countries comes from taxes with a narrow base. This chapter provides a derivation of the forecasted tax policy coming from a Grossman-Helpman (1994) style political economy model, and compares these forecasts with those derived in the Gordon-Li model. It then reviews the empirical evidence to compare it with the forecasts from these two models.

Keywords: economic policies; developing countries; political economy model; Gordon-Li model; forecasts; taxes; richer countries

Chapter.  14975 words. 

Subjects: Business and Management

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