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Is the Value Added Tax Naturally Progressive?

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Author Info

  • Glenn P. Jenkins

    ()
    (Department of Economics, Queen's University)

  • Hatice Jenkins

    ()
    (Department of Banking and Finance, Eastern Mediterranean University)

  • Chun-Yan Kuo

    ()
    (John Deutsch Institute, Department of Economics, Queen's University)

Abstract

A broad based consumption tax, such as a value added tax, is generally considered to be a regressive tax. This conclusion, however, has not taken into account the fact that in developing countries the commodities on which poor households spend most of their income, even if they are included in the legal tax base, are administratively impractical to tax. This paper employs a rich data set on household incomes and expenditures for the Dominican Republic. The data set covers 2042 goods and services purchased by households of different income and consumption levels. It also contains information on the type of establishment from which the items were purchased. With this information, we estimate the effective rate of tax that has been paid on each item purchased by households. These estimations include the effect of the different rates of the tax compliance across households with different expenditure levels. The results of the study show that the burden of the current VAT in the Dominican Republic is progressive over all the quintiles of household expenditure. Furthermore, if the base of the VAT is made comprehensive, the estimated incidence of the burden of the VAT is still progressive over all the quintiles of household expenditure.

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File URL: http://qed.econ.queensu.ca/working_papers/papers/qed_wp_1059.pdf
File Function: First version 2006
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Bibliographic Info

Paper provided by Queen's University, Department of Economics in its series Working Papers with number 1059.

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Length: 24 pages
Date of creation: Apr 2006
Date of revision:
Handle: RePEc:qed:wpaper:1059

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Keywords: Value Added Tax; incidence; compliance;

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References

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  1. Gilbert E. Metcalf, 1994. "Lifecycle vs. Annual Perspectives on the Incidence of A Value Added Tax," NBER Working Papers 4619, National Bureau of Economic Research, Inc.
  2. Gilbert E. Metcalf, 1995. "Value-Added Taxation: A Tax Whose Time Has Come?," Journal of Economic Perspectives, American Economic Association, vol. 9(1), pages 121-140, Winter.
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Cited by:
  1. Richard M. Bird, 2013. "Foreign Advice and Tax Policy in Developing Countries," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper1307, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
  2. Michael Keen & Ben Lockwood, 2007. "The Value Added Tax: Its Causes and Consequences," Economics Working Papers ECO2007/09, European University Institute.
  3. Arsić, Milojko & Altiparmakov, Nikola, 2013. "Equity aspects of VAT in emerging European countries: A case study of Serbia," Economic Systems, Elsevier, vol. 37(2), pages 171-186.
  4. Michael Keen, 2009. "What Do (and Don't) We Know about the Value Added Tax? A Review of Richard M. Bird and Pierre-Pascal Gendron's The VAT in Developing and Transitional Countries," Journal of Economic Literature, American Economic Association, vol. 47(1), pages 159-70, March.
  5. Rodrigo Cubero & Ivanna Vladkova Hollar, 2010. "Equity and Fiscal Policy: The Income Distribution Effects of Taxation and Social Spending in Central America," IMF Working Papers 10/112, International Monetary Fund.
  6. Christian E. Weller & Manita Rao, 2008. "Can Progressive Taxation Contribute to Economic Development?," Working Papers wp176, Political Economy Research Institute, University of Massachusetts at Amherst.
  7. Michael Keen, 2012. "Taxation and Development - Again," IMF Working Papers 12/220, International Monetary Fund.

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