Medium-Term Effects of a Rise in VAT on Standard of Living and Inequality: A Microsimulation Approach

Mathias Andre and Anne-Lise Biotteau

Economie et Statistique / Economics and Statistics, 2021, issue 522-523, 5-21

Abstract: [eng] A rise in VAT has both direct and delayed effects on standard of living and inequality. Such a rise translates into an increase in prices that same year. Earnings and other types of income are partly adjusted subsequently. The scales for social security benefits and direct taxes are also index-linked to inflation. This work offers an ex-ante evaluation of these mechanisms using the INES microsimulation model. Three years after a three-point rise in the standard rate of VAT, the standard of living, adjusted for VAT and spending on rent, would be 0.6% lower in real terms, on average, than if there had been no rise. This delayed effect equates to 45% of the initial effect. The poorest 10% of people suffer a relative fall in their adjusted standard of living three times greater than the rest of the population.

JEL-codes: H23 H24 H31 I32 (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:nse:ecosta:ecostat_2021_522d_1

DOI: 10.24187/ecostat.2021.522d.2037

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