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

Adrian Peralta, Marina Tavares, Xuan Tam and Xin Tang

No 2018/146, IMF Working Papers from International Monetary Fund

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.

Keywords: WP; transfer program; Gini coefficient; Fiscal Consolidations; Inequality; Low-income Countries; consumption-saving decision; clearing condition; consumption expenditure; goods consumption; consumption goods; production function; Consumption; Value-added tax; Manufacturing; Income (search for similar items in EconPapers)
Pages: 36
Date: 2018-06-13
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Citations: View citations in EconPapers (2)

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Working Paper: The Macroeconomic and Distributional Implications of Fiscal Consolidations in Low-income Countries (2018)
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