Peasants versus City-Dwellers: Taxation and the Burden of Economic Development

By Raaj K. Sah; Joseph E. Stiglitz | Go to book overview

Preface

This book is written with three audiences in mind: development economists, public finance economists, and economic historians. One objective of this book is to address certain central questions facing today's LDCs (less developed countries) such as: Who should bear the costs of development? How should the investment funds required for modernization be mobilized? Associated with such broad questions are a host of specific policy questions, such as: Should the urban sector be taxed? If taxes are imposed on the urban sector, should they be imposed at a uniform rate or at different rates across different goods and individuals? If differential tax rates should be imposed, on what principles should the rates be differentiated? Should the government provide food subsidies to the urban poor? Should the government tax or subsidize fertilizer and other modern inputs in the rural sector? To what extent should the relative prices of industrial and agricultural goods be moved against or in favour of the agricultural sector? That is, what should the 'size of the scissors' be, to use the terminology employed in the Soviet industrialization debate following the October Revolution and more recently in the People's Republic of China? Alternatively stated in the terminology of modern public finance: What should the appropriate level of taxation or subsidy be on the rural sector?

We believe that the policy issues of the type described above can be addressed only by developing and using models that adequately capture the central features of LDCs. One cannot simply apply the results of the standard neoclassical model to LDCs even if one thinks this model is appropriate for developed countries. Thus, one of the contributions of this book is to construct a range of simple but comprehensive general-equilibrium models of LDCs. These models are simple enough to yield qualitative results and to identify the central parameters relevant for policy analysis, but comprehensive enough to allow us to deal with the great diversity of institutions and behaviour observed in different LDCs.

The issues of development policy that this book addresses are those which LDC governments and their advisers are required to face. For this reason, we have attempted to make the conclusions, and the intuitions and assumptions which lie behind them, accessible to those outside the circle of academic economists. Each chapter contains a statement of the problems at hand and a summary of the analysis.

Another audience this book addresses is that of public finance economists. The past three decades have seen rapid advances in the theory of public finance, for example the analysis of tax incidence within general-equilibrium models, and developments of the Ramsey-Pigou analysis of optimal taxation. But these two strands of the public finance literature have, for the

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