Event Information
The next EEU seminar will be held on Monday the 16th of Mars at 12:10 – 13:00 in B44.
The seminar will be held by Lushanya Dayathilake who will present on the topic of: When Carbon Taxes Beat VAT in Fiscal Policy: The Role of Informality.
Lushanya Dayathilake is a PhD researcher at Berlin School of Economics who studies climate policy and environmental economics, particularly carbon pricing and sustainable economic transitions.
When: Monday, Mars 16th at 12:10-13:00.
Where: B44
Speaker: Lushanya Dayathilake
Online: Zoom
Summary: Developing economies with large informal sectors have increasingly met additional revenue needs through greater reliance on the value-added tax (VAT), yet further VAT increases can be self-limiting when higher consumer prices divert activity into untaxed production. We compare two marginal revenue instruments: an invoice–credit VAT rate and an upstream carbon tax. In a two-sector model in which informal firms evade VAT on sales but bear embedded VAT via purchases of formal intermediates, we derive an implementable welfare ranking. A VAT increase raises the formal break-even price more than it raises informal marginal cost, contracting demand and formal output while expanding informality. An upstream energy tax, by contrast, does not mechanically widen the formal–informal wedge and, under empirically plausible cost-share conditions, raises a given marginal revenue target at lower welfare cost and with smaller consumer-price pass-through than an equivalent VAT increase, even before valuing emissions reductions. Thus, for high-informality economies seeking fiscally sustainable paths to development, carbon taxation is not merely a climate instrument, it is a structurally superior revenue tax instrument that they have independent reason to adopt.