Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/115444
Authors: 
Espino, Emilio
Gonzalez-Rozada, Martín
Year of Publication: 
2013
Series/Report no.: 
IDB Working Paper Series IDB-WP-440
Abstract: 
This paper explores the qualitative and quantitative implications of optimal taxation in a developing economy when economic growth is endogenously determined. We differentiate this class of economies from a developed economy in two aspects: informal sector is quantitatively significant and tax-collecting technologies are more rudimentary. We characterize competitive equilibrium allocations and Ramsey allocations in the context of a small open economy in which the interest rate is endogenously determined, some workers can be hired in the informal market, and imperfect tax-collecting technology can be heterogeneous across different types of taxes. We calibrate the parameters of our model to the Chilean economy. Overall, our results suggest that capital should still be taxed but considerably less than actual taxes (that is, 10.78 percent versus 18.5 percent). Labor should be subsidized (to stimulate accumulation of human capital), while consumption taxes should be increased by 50 percent approximately (from 19 percent to 28 percent). As expected, the better the tax collecting technologies, the higher the corresponding taxes. In this context, the resulting growth rate increases only slightly along the balanced growth path.
Subjects: 
Optimal fiscal policy
economic growth
inefficient tax collecting technology
JEL: 
E61
E62
H21
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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