Skip to main content

Tax-tariff reform with costs of tax administration


As is broadly recognised, the straightforward application of the Diamond–Mirrlees (1971) production efficiency theorem implies that when lump-sum taxation is not available, then it is optimal for the government in a small open economy to rely on taxes on the net demand of households rather than on border taxes to finance its resource requirements. However, the theorem does not hold when taxation is associated with administrative costs. The present paper explores the implications for optimal taxation and for desirable directions of tax-tariff reform of taking into account the costs of tax administration in countries at different levels of economic development. The paper clarifies the reasons for, and lends support to, the criticism by Stiglitz (Presentation to Congress of International Institute of Public Finance, Prague, 2003) of the IMF and the World Bank’s recommendation to developing countries to adopt VAT to replace border taxes.

This is a preview of subscription content, access via your institution.


  • Allingham, M., & Sandmo, A. (1972). Income tax evasion: a theoretical analysis. Journal of Public Economics, 1, 323–338.

    Article  Google Scholar 

  • Anderson, J. E. (2002). Trade reform diagnostics with many households, quotas and tariffs. Review of International Economics, 10(2), 215–236.

    Article  Google Scholar 

  • Andreoni, J., Erard, B., & Feinstein, J. (1998). Tax compliance. Journal of Economic Literature, 96, 818–860.

    Google Scholar 

  • Baunsgaard, T., & Keen, M. (2005). Tax revenue and (or) trade liberalisation. Working paper, IMF.

  • Bird, R. M. (2005). Value added taxes in developing and transitional countries. Working paper, Andrew Young School of Policy Studies, Georgia State University.

  • Corlett, W. J., & Hague, D. C. (1953). Complementarity and excess burden of taxation. Review of Economic Studies, 21, 21–30.

    Article  Google Scholar 

  • Dasgupta, P., & Stiglitz, J. E. (1974). Benefit-cost analysis and trade policies. Journal of Political Economy, 82, 1–33.

    Article  Google Scholar 

  • Diamond, P. A., & McFadden, D. L. (1974). Some uses of the expenditure function in public finance. Journal of Public Economics, 3, 3–21.

    Article  Google Scholar 

  • Diamond, P. A., & Mirrlees, J. A. (1971). Optimal taxation and public production I: production efficiency. II: tax rules. American Economic Review, 61, 8–27, 261–278.

    Google Scholar 

  • Diewert, W. E., Turunen-Red, A. H., & Woodland, A. D. (1989). Productivity and Pareto-improving changes in taxes and tariffs. Review of Economic Studies, 56, 199–216.

    Article  Google Scholar 

  • Dixit, A. K. (1985). Tax policy in open economies. In A. J. Auerbach & M. Feldstein (Eds.), Handbook of public economics (Vol. I). Amsterdam: North-Holland.

    Google Scholar 

  • Dixit, A., & Munk, K. J. (1977). Welfare effects of tax and price changes. Correction. Journal of Public Economics, 8, 103–107.

    Article  Google Scholar 

  • Dixit, A. K., & Norman, V. (1980). The theory of international trade. Cambridge: Cambridge University Press.

    Google Scholar 

  • Emran, M. S., & Stiglitz, J. (2005). On selective indirect tax reform in developing countries. Journal of Public Economics, 89, 599–623.

    Article  Google Scholar 

  • Evans, C. (2003). Studying the studies: an overview of recent research into taxation operating costs. Journal of Tax Research, 1, 64–92.

    Google Scholar 

  • Gordon, R., & Li, W. (2005). Puzzling tax structures in developing countries: a comparison of two alternative explanation. NBER working paper.

  • Grossman, G., & Helpman, E. (1994). Protection for sale. American Economic Review, 84, 833–850.

    Google Scholar 

  • Harberger, A. C. (1974). Taxation and welfare. Chicago: Chicago University Press.

    Google Scholar 

  • Hatta, T. (1977). A recommendation for a better tariff structure. Econometrica, 45, 1859–1869.

    Article  Google Scholar 

  • Hatta, T., & Ogawa, Y. (2003). A theory of optimal tariffs under a revenue constraint. CSIS discussion paper.

  • Heady, C., & Mitra, P. (1982). Restricted redistributive taxation, shadow prices and trade policy. Journal of Public Economics, 17, 1–22.

    Article  Google Scholar 

  • Heady, C., & Mitra, P. (1987). Distributional and revenue raising arguments for tariffs. Journal of Development Economics, 26, 77–101.

    Article  Google Scholar 

  • Keen, M., & Ligthart, J. E. (2002). Coordinating tariff reduction and domestic tax reform. Journal of International Economics, 56, 489–507.

    Article  Google Scholar 

  • Kimbrough, K. P., & Gardner, G. W. (1992). Tax regimes, tariff revenues, and government spending. Economica, 59, 75–92.

    Article  Google Scholar 

  • Laffont, J. J. (2004). Management of public utilities in China. Annals of Economics and Finance, 5, 185–210.

    Google Scholar 

  • Munk, K. J. (1980). Optimal taxation with some none-taxable commodities. Review of Economic Studies, 47, 755–765.

    Article  Google Scholar 

  • Munk, K. J. (1998). Should governments create production inefficiency. EPRU working paper 1998-20, University of Copenhagen.

  • Munk, K. J. (2006a). On the rationale for the use of border taxes in developing countries. Working paper, University of Aarhus.

  • Munk, K. J. (2006b). Welfare effects of tax and price changes and the CES-UT utility function. Working paper, University of Aarhus.

  • Munk, K. J., & Rasmussen, B. (2005). On the determinants of optimal border taxes for a small open economy. Working paper, University of Aarhus.

  • Myles, G. D. (1995). Public economics. Cambridge: Cambridge University Press.

    Google Scholar 

  • OECD (2004). Tax administration in OECD countries: comparative information series.

  • Schneider, F., & Enste, D. H. (2002). Shadow economies: size, causes, and consequences. Journal of Economic Literature, 38, 77–114.

    Google Scholar 

  • Stiglitz, J. E. (2003). Development oriented tax policy. Presentation to Congress of International Institute of Public Finance, Prague.

  • Stiglitz, J. E., & Dasgupta, P. S. (1971). Differential taxation, public goods and economic efficiency. Review of Economic Studies, 38, 151–174.

    Article  Google Scholar 

  • World Bank (1988). World development report 1988. Oxford: Oxford University Press.

    Book  Google Scholar 

Download references

Author information

Authors and Affiliations


Corresponding author

Correspondence to Knud J. Munk.

Rights and permissions

Reprints and Permissions

About this article

Cite this article

Munk, K.J. Tax-tariff reform with costs of tax administration. Int Tax Public Finance 15, 647–667 (2008).

Download citation

  • Published:

  • Issue Date:

  • DOI:


  • Optimal taxation
  • Optimal trade policy
  • VAT
  • Tax-tariff reform
  • Costs of tax administration
  • Informal sector
  • Developing


  • F11
  • F13
  • H21