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The Macroeconomic and Distributional Implications of Fiscal Consolidations in Low-income Countries

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  • Mr. Adrian Peralta Alva
  • Ms. Marina Mendes Tavares
  • Xuan S. Tam
  • Xin Tang

Abstract

We quantitatively investigate the macroeconomic and distributional impacts of fiscal consolidations in low-income countries (LICs) through value added tax (VAT), personal income tax (PIT), and corporate income tax (CIT). We extend the standard heterogeneous agents incomplete markets model by including multiple sectors and rural-urban distinction to capture salient features of LICs. We find that overall, VAT has the least efficiency costs but is highly regressive, while PIT impacts the economy in the opposite way with CIT staying in between. Cash transfers targeting rural households mitigate the negative distributional impacts of VAT most effectively, while public investment leads to little redistribution.

Suggested Citation

  • Mr. Adrian Peralta Alva & Ms. Marina Mendes Tavares & Xuan S. Tam & Xin Tang, 2018. "The Macroeconomic and Distributional Implications of Fiscal Consolidations in Low-income Countries," IMF Working Papers 2018/146, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2018/146
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    Cited by:

    1. Mr. Niels-Jakob H Hansen & Albe Gjonbalaj, 2019. "Advancing Inclusive Growth in Cambodia," IMF Working Papers 2019/187, International Monetary Fund.
    2. Haryo KUNCORO, 2019. "Tax Counterbalancing In Developing Countries The Case Of Indonesia," REVISTA ADMINISTRATIE SI MANAGEMENT PUBLIC, Faculty of Administration and Public Management, Academy of Economic Studies, Bucharest, Romania, vol. 2019(32), pages 77-92, June.
    3. Albert Jan Hummel & Vinzenz Ziesemer, 2021. "Food Subsidies in General Equilibrium," CESifo Working Paper Series 9201, CESifo.

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