2020 Conference on Firms, Trade and Development - Lucie Gadenne

TL;DR

Tax systems, particularly value-added taxes (VAT), affect trade and market integration in developing countries, leading to segmentation in supply networks.

Transcript

welcome everybody uh my name is dave donaldson uh and on behalf of um the rest of the organizers of this event uh that's david atkins cecile gobert pete clenow imran rozul meredith starts eric bergen and chris woodruff we're all delighted that you could join us today not quite the usual fun of being together in person uh especially in california th... Read More

Key Insights

• ™️ Taxes, including VAT, affect trade and market integration in developing countries.
• ⛓️ Supply chain distortions and strategic complementarities contribute to the segmentation of supply networks.
• 🔒 Reforms that remove VAT-induced distortions can promote trade and firm growth.

Questions & Answers

Q: How do taxes, particularly value-added taxes (VAT), affect trade in developing countries?

Taxes, such as VAT, can hinder market integration by creating segmentation in supply networks. VAT-paying firms are more likely to transact with other VAT-paying firms, resulting in limited trade with non-VAT paying firms.

Q: What are supply chain distortions?

Supply chain distortions occur when firms that pay VAT prefer to buy inputs from other VAT-paying firms rather than from non-VAT paying firms. This preference is driven by the ability to deduct VAT paid by suppliers, leading to segmented supply networks.

Q: How do strategic complementarities impact firms' tax decisions?

Strategic complementarities play a role in firms' decisions to pay VAT. Firms consider the VAT status of their trading partners and may choose to pay VAT to align with other VAT-paying firms. This creates multiplier effects, as the tax status of one firm affects the decisions of others.

Q: What are the implications of this study for tax policies in developing countries?

The study suggests that VAT systems can limit market integration and keep smaller firms small. Reforms that remove VAT-induced distortions to trade, particularly between firms in different states, can promote trade and firm growth. The study also highlights the importance of considering the informal sector in the context of tax policies.

Summary & Key Takeaways

• The paper explores how taxes, specifically value-added taxes (VAT), influence trade in developing countries.

• It analyzes the extent of segmentation in supply networks between firms that pay VAT and those that do not.

• The study also examines the impact of supply chain distortions and strategic complementarities on firms' tax decisions.