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Redistribution via VAT and Cash Transfers: An Assessment in Four Low and Middle Income Countries

Author

Listed:
  • David Phillips

    (Institute of Fiscal Studies.)

  • Ross Warwick

    (Institute of Fiscal Studies.)

  • Maya Goldman

    (CEQ Institute)

  • Karolina Goraus

    (Karolina Goraus, World Bank)

  • Gabriela Inchauste

    (World Bank)

  • Tom Harris

    (Institute of Fiscal Studies.)

  • Jon Jellema

    (CEQ Institute)

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.

Suggested Citation

  • David Phillips & Ross Warwick & Maya Goldman & Karolina Goraus & Gabriela Inchauste & Tom Harris & Jon Jellema, 2018. "Redistribution via VAT and Cash Transfers: An Assessment in Four Low and Middle Income Countries," Commitment to Equity (CEQ) Working Paper Series 78, Tulane University, Department of Economics.
  • Handle: RePEc:tul:ceqwps:78
    as

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    File URL: http://repec.tulane.edu/RePEc/ceq/ceq78.pdf
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    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.
    2. Cremer, Helmuth & Gahvari, Firouz, 1993. "Tax evasion and optimal commodity taxation," Journal of Public Economics, Elsevier, vol. 50(2), pages 261-275, February.
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    4. Hughes, G A, 1986. "A New Method for Estimating the Effects of Fuel Taxes: An Application to Thailand," World Bank Economic Review, World Bank Group, 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. Bird,Richard & Gendron,Pierre-Pascal, 2011. "The VAT in Developing and Transitional Countries," Cambridge Books, Cambridge University Press, number 9781107401440.
    7. 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.
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    9. 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.
    10. Quentin Wodon, 2012. "Improving the Targeting of Social Programs in Ghana," World Bank Publications, The World Bank, number 13082, August.
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    More about this item

    Keywords

    fiscal incidence; poverty; inequality; value-added tax reform; universal benefit; Ghana; Ethiopia; Zambia; Senegal;

    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

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