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:
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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