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

Adrian Peralta-Alva, Marina Tavares, Xin Tang and Xuan Tam
Additional contact information
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

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.

Date: 2018
New Economics Papers: this item is included in nep-dge and nep-mac
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More papers in 2018 Meeting Papers from Society for Economic Dynamics Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA. Contact information at EDIRC.
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