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Reducing the regressivity of indirect taxation in Brazil through a personalized value-added tax

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  • Oliver, Xisco
  • Encabo, Isabel
  • Padilha, Giovanni
  • Piccoli, Luca

Abstract

ICMS is a value-added tax and the most important tax in Brazil in terms of revenue. This paper investigates the technical feasibility and impact of a reform to ICMS. The aim of the reform is twofold, on the one hand, to modernize the tax and redress some current flaws in terms of neutrality, simplicity and transparency and, on the other, to reduce its regressivity, increase redistribution, reduce poverty and impact positively on social welfare (without a loss in the tax revenue). A static behavioral microsimulation model was purpose-constructed to study the proposed reform. The new tax simplifies the current system by introducing a single general tax rate and an increased rate for alcoholic beverages and tobacco, without exemptions, combining this with a total or partial refund for the poorest families. The empirical results show that the new tax is superior to the current one, both in terms of efficiency and equity.

Suggested Citation

  • Oliver, Xisco & Encabo, Isabel & Padilha, Giovanni & Piccoli, Luca, 2022. "Reducing the regressivity of indirect taxation in Brazil through a personalized value-added tax," Journal of Policy Modeling, Elsevier, vol. 44(5), pages 903-919.
    • Handle: RePEc:eee:jpolmo:v:44:y:2022:i:5:p:903-919
    DOI: 10.1016/j.jpolmod.2022.09.002
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    More about this item

    Keywords

    ICMS; Efficiency and redistribution; Behavioral microsimulation model; Almost-ideal demand system; Indirect taxation;
    All these keywords.

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • C30 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - General
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household

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