IDEAS home Printed from https://ideas.repec.org/p/ifs/ifsewp/18-11.html
   My bibliography  Save this paper

Redistribution via VAT and cash transfers: an assessment in four low and middle income countries

Author

Listed:
  • Tom Harris

    (Institute for Fiscal Studies and Institute for Fiscal Studies)

  • David Phillips

    (Institute for Fiscal Studies and Institute for Fiscal Studies)

  • Ross Warwick

    (Institute for Fiscal Studies and Institute for Fiscal Studies)

  • Maya Goldman

    (Institute for Fiscal Studies)

  • Jon Jellema

    (Institute for Fiscal Studies)

  • Karolina Goraus

    (Institute for Fiscal Studies)

  • Gabriela Inchauste

    (Institute for Fiscal Studies)

Abstract

As in high-income countries, reduced rates of VAT and VAT exemptions (“preferential VAT rates”) are a common feature of indirect tax systems in LMICs. Many of the goods and services that are granted preferential rates – such as foodstuffs and kerosene – seem likely to receive such treatment on the grounds that they provide a means for the government to indirectly target poorer households, for whom such expenditures may take up a large proportion of their total budget. We use microsimulation methods to estimate the impact of preferential VAT rates in four LMIC countries, considering their effect on revenues, poverty, inequality, and across the consumption distribution. We consider whether other policy tools might be better suited for the pursuit of distributional objectives by estimating the impact of existing cash transfer schemes and a hypothetical scenario where the revenue raised from broadening the VAT base is used to fund a Universal Basic Income (UBI) in each country. We find that although preferential VAT rates reduce poverty, they are not well targeted towards poor households overall. Existing cash transfer schemes are better targeted but would not provide a suitable means of compensation for a broader VAT base given issues related to coverage and targeting mechanisms. Despite being completely untargeted, a UBI funded by the revenue gains from a broader VAT base would create large net gains for poor households and reduce inequality and most measures of extreme poverty in each of the countries studied – even if only 75% of the additional VAT revenue was disbursed as UBI payments. This is the first draft of a paper examining the distributional impacts of VAT exemptions and reduced rates and direct cash (and near-cash) transfer schemes in a series of low and middle income (LMIC) countries. All results presented are preliminary; it is being shared in order to elicit comments and provide early sight of findings we consider robust. Figure 5.1 from the working paper - The distributional impact of a implementing a uniform VAT and using 100% of the revenue gain to fund a UBI in four LMICs

Suggested Citation

  • Tom Harris & David Phillips & Ross Warwick & Maya Goldman & Jon Jellema & Karolina Goraus & Gabriela Inchauste, 2018. "Redistribution via VAT and cash transfers: an assessment in four low and middle income countries," IFS Working Papers W18/11, Institute for Fiscal Studies.
    • Handle: RePEc:ifs:ifsewp:18/11
    as

    Download full text from publisher

    File URL: https://www.ifs.org.uk/uploads/WP201811.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. (IFS), Institute for Fiscal Studies & Mirrlees, James (ed.), 2011. "Tax By Design: The Mirrlees Review," OUP Catalogue, Oxford University Press, number 9780199553747, Decembrie.
    2. Cremer, Helmuth & Gahvari, Firouz, 1993. "Tax evasion and optimal commodity taxation," Journal of Public Economics, Elsevier, vol. 50(2), pages 261-275, February.
    3. repec:idb:brikps:79778 is not listed on IDEAS
    4. Hughes, G A, 1986. "A New Method for Estimating the Effects of Fuel Taxes: An Application to Thailand," The World Bank Economic Review, World Bank, vol. 1(1), pages 65-101, September.
    5. Vivi Alatas & Abhijit Banerjee & Rema Hanna & Benjamin A. Olken & Julia Tobias, 2012. "Targeting the Poor: Evidence from a Field Experiment in Indonesia," American Economic Review, American Economic Association, vol. 102(4), pages 1206-1240, June.
    6. Youssef Benzarti & Dorian Carloni & Jarkko Harju & Tuomas Kosonen, 2020. "What Goes Up May Not Come Down: Asymmetric Incidence of Value-Added Taxes," Journal of Political Economy, University of Chicago Press, vol. 128(12), pages 4438-4474.
    7. Bird,Richard & Gendron,Pierre-Pascal, 2011. "The VAT in Developing and Transitional Countries," Cambridge Books, Cambridge University Press, number 9781107401440.
    8. Kleven, Henrik Jacobsen & Richter, Wolfram F & Sorensen, Peter Birch, 2000. "Optimal Taxation with Household Production," Oxford Economic Papers, Oxford University Press, vol. 52(3), pages 584-594, July.
    9. repec:wbk:wbpubs:13081 is not listed on IDEAS
    10. Ahmad, Ehtisham & Best, Michael, 2012. "Financing social policy in the presence of informality," LSE Research Online Documents on Economics 57964, London School of Economics and Political Science, LSE Library.
    11. Quentin Wodon, 2012. "Improving the Targeting of Social Programs in Ghana," World Bank Publications - Books, The World Bank Group, number 13082, December.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Bachas, Pierre & Gadenne, Lucie & Jensen, Anders, 2020. "Informality, Consumption Taxes and Redistribution," The Warwick Economics Research Paper Series (TWERPS) 1277, University of Warwick, Department of Economics.
    2. Evans Tindana Awuni & Daniele Malerba & Babette Never, 2023. "Understanding Vulnerability to Poverty, COVID-19’s Effects, and Implications for Social Protection: Insights from Ghana," Progress in Development Studies, , vol. 23(3), pages 246-274, July.
    3. World Bank, 2019. "World Development Report 2019 [Rapport sur le développement dans le monde 2019]," World Bank Publications - Books, The World Bank Group, number 30435, December.
    4. Haydeeliz Carrasco & Hamidou Jawara & Moritz Meyer, 2022. "The Effects Of Fiscal Policy On Inequality And Poverty In The Gambia," Commitment to Equity (CEQ) Working Paper Series 117, Tulane University, Department of Economics.
    5. Rebone Gcabo & Boitumelo Moche & Wynnona Steyn & Boikhutso Moahlodi & Jukka Pirttilä & Michael Noble & Gemma Wright & Helen Barnes & Faith Masekesa, 2019. "Modelling value-added tax (VAT) in South Africa: Assessing the distributional impact of the recent increase in the VAT rate and options for redress through the benefits system," WIDER Working Paper Series wp-2019-13, World Institute for Development Economic Research (UNU-WIDER).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Spencer Bastani & Sebastian Koehne, 2022. "How Should Consumption Be Taxed?," CESifo Working Paper Series 10038, CESifo.
    2. Houssou, Nazaire & Asante-Addo, Collins & Andam, Kwaw S., 2017. "Improving the targeting of fertilizer subsidy programs in Africa south of the Sahara: Perspectives from the Ghanaian experience," IFPRI discussion papers 1622, International Food Policy Research Institute (IFPRI).
    3. Bachas, Pierre & Gadenne, Lucie & Jensen, Anders, 2020. "Informality, Consumption Taxes and Redistribution," The Warwick Economics Research Paper Series (TWERPS) 1277, University of Warwick, Department of Economics.
    4. Dora Benedek & Ruud A. Mooij & Michael Keen & Philippe Wingender, 2020. "Varieties of VAT pass through," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 27(4), pages 890-930, August.
    5. Julio López Laborda & Carmen Marín González & Jorge Onrubia, 2018. "Tipo reducido, superreducido y exenciones en el IVA: una estimación de sus efectos recaudatorios y distributivos a partir de las encuestas de hogares," Studies on the Spanish Economy eee2018-23, FEDEA.
    6. Ravi Kanbur & Tuuli Paukkeri & Jukka Pirttilä & Matti Tuomala, 2018. "Optimal taxation and public provision for poverty reduction," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 25(1), pages 64-98, February.
    7. Asatryan, Zareh & Gomtsyan, David, 2020. "The incidence of VAT evasion," ZEW Discussion Papers 20-027, ZEW - Leibniz Centre for European Economic Research.
    8. Antonio Gómez Gómez-Plana & Pedro Pascual Arzoz, 2011. "Fraude fiscal e IVA en España: incidencia en un modelo de equilibrio general," Hacienda Pública Española / Review of Public Economics, IEF, vol. 199(4), pages 9-52, December.
    9. John T. Revesz, 2014. "A Numerical Model of Optimal Differentiated Indirect Taxation," Hacienda Pública Española / Review of Public Economics, IEF, vol. 211(4), pages 9-66, December.
    10. Junichi Minagawa & Thorsten Upmann, 2018. "Optimal taxation under a consumption target," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 50(4), pages 663-676, April.
    11. Warwick, Ross & Harris, Tom & Phillips, David & Goldman, Maya & Jellema, Jon & Inchauste, Gabriela & Goraus-Tańska, Karolina, 2022. "The redistributive power of cash transfers vs VAT exemptions: A multi-country study," World Development, Elsevier, vol. 151(C).
    12. Buettner, Thiess & Madzharova, Boryana, 2018. "WTO membership and the shift to consumption taxes," World Development, Elsevier, vol. 108(C), pages 197-218.
    13. Michael Smart, 2012. "Departures from Neutrality in Canada's Goods and Services Tax," SPP Research Papers, The School of Public Policy, University of Calgary, vol. 5(5), February.
    14. Cesar Revoredo-Giha & Luiza Toma & Faical Akaichi, 2020. "An Analysis of the Tax Incidence of VAT to Milk in Malawi," Sustainability, MDPI, vol. 12(19), pages 1-17, September.
    15. Odd E. Nygård & John T. Revesz, 2015. "Optimal indirect taxation and the uniformity debate: A review of theoretical results and empirical contributions," Discussion Papers 809, Statistics Norway, Research Department.
    16. Gabriel RAITA, 2021. "A Theoretical Approach Of The Fiscal System In Romania," Annales Universitatis Apulensis Series Oeconomica, Faculty of Sciences, "1 Decembrie 1918" University, Alba Iulia, vol. 1(23), pages 1-5.
    17. Phil Dean & Maclean Gaulin & Nathan Seegert & Mu-Jeung Yang, 2023. "The COVID-19 state sales tax windfall," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 30(5), pages 1408-1434, October.
    18. Odd E. Nygard & John T. Revesz, 2016. "A literature review on optimal indirect taxation and the uniformity debate," Hacienda Pública Española / Review of Public Economics, IEF, vol. 218(3), pages 107-140, September.
    19. Henrekson, Magnus & Johansson, Dan, 2010. "Firm Growth, Institutions and Structural Transformation," Ratio Working Papers 150, The Ratio Institute.
    20. Montag, Felix & Mamrak, Robin & Sagimuldina, Alina & Schnitzer, Monika, 2023. "Imperfect price information, market power, and tax pass-through," Working Papers 337, The University of Chicago Booth School of Business, George J. Stigler Center for the Study of the Economy and the State.

    More about this item

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence
    • H53 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Welfare Programs
    • I38 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - Government Programs; Provision and Effects of Welfare Programs

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ifs:ifsewp:18/11. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Emma Hyman (email available below). General contact details of provider: https://edirc.repec.org/data/ifsssuk.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.