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Citation Information

Type Working Paper
Title Consumption taxes, redistribution and informality
Author(s)
Publication (Day/Month/Year) 2019
URL https://eml.berkeley.edu/~webfac/auerbach/Redistribution.pdf
Abstract
We study how the presence of large informal sectors in developing countries impacts the distributional properties of consumption taxes. We assemble a dataset of household expenditure using micro-data from 20 countries at different levels of economic development. Using the place of purchase to proxy for informal consumption, we show a large negative relation between informal consumption shares and households’ total expenditure, which is robust to product and geography controls. This impliesthatconsumptiontaxesarede-factoprogressive: householdsinthetopdecile pay 70% more taxes as a share of expenditure than households in the bottom decile. Finally, we build a model of optimal commodity taxation in the presence of informal consumption, which we calibrate to our data. We ?nd that optimal tax rates are less differentiated across products with an informal sector. Tax exempting necessities, such as food, is rarely optimal as it leads to only a marginal gain in progressivity.

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