COMMODITY TAX STRUCTURE AND INFORMAL ACTIVITY

Authors


University of Macedonia (Economic and Social Sciences), 156 Egnatia Street, Thessaloniki 540 06, Greece. Tel: 0030 2310891468; Fax: 0030 2310891420; E-mail: sd@uom.gr.

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.

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