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

David Phillips, Ross Warwick, Maya Goldman, Karolina Goraus-Tańska, Gabriela Inchauste, Tom Harris and Jon Jellema
Additional contact information
David Phillips: Institute of Fiscal Studies.
Ross Warwick: Institute of Fiscal Studies.
Maya Goldman: CEQ Institute
Tom Harris: Institute of Fiscal Studies.
Jon Jellema: CEQ Institute

No 78, Commitment to Equity (CEQ) Working Paper Series from Tulane University, Department of Economics

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.

Keywords: fiscal incidence; poverty; inequality; value-added tax reform; universal benefit; Ghana; Ethiopia; Zambia; Senegal (search for similar items in EconPapers)
JEL-codes: D31 H22 H53 I38 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2018-03
New Economics Papers: this item is included in nep-pbe
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Citations: View citations in EconPapers (12)

Published in Commitment to Equity, March 2018, pages 1-32

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http://repec.tulane.edu/RePEc/ceq/ceq78.pdf First version, 2018 (application/pdf)

Related works:
Working Paper: Redistribution via VAT and cash transfers: an assessment in four low and middle income countries (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:tul:ceqwps:78

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