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Keywords:

  • ad valorem taxes;
  • informality;
  • specific taxes
  • H22;
  • H26;
  • H32

ABSTRACT

Commodity tax structure affects the firm's choice between formality and informality. An increase in the specific tax rate, relative to an equivalent increase in ad valorem taxation, makes informality attractive to more firms. Formality becomes attractive at lower levels of profits under ad valorem taxation. For both the maximization of welfare subject to a revenue constraint and the unconstrained maximization of revenue, the optimal rate of specific taxation is zero.