The Macroeconomic and Distributional Implications of Fiscal Consolidations in Low-income Countries
Xin Tang and
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Adrian Peralta-Alva: International Monetary Fund
Xin Tang: International Monetary Fund and Wuhan University
Xuan Tam: City University of Hong Kong
No 183, 2018 Meeting Papers from Society for Economic Dynamics
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.
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed018:183
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