Is the Value Added Tax Naturally Progressive?

Abstract

A broad based consumption tax, such as a value added tax, is generally considered to be a regressive tax. This conclusion, however, has not taken into account the fact that in developing countries the commodities on which poor households spend most of their income, even if they are included in the legal tax base, are administratively impractical to tax. This paper employs a rich data set on household incomes and expenditures for the Dominican Republic. The data set covers 2042 goods and services purchased by households of different income and consumption levels. It also contains information on the type of establishment from which the items were purchased. With this information we estimate the effective rate of tax that has been paid on each item purchased by households. These estimations include the effect of the different rates of the tax compliance across households with different expenditure levels. The results of the study show that the burden of the current VAT in the Dominican Republic is progressive over all the quintiles of household expenditure. Furthermore, if the base of the VAT is made comprehensive, the estimated incidence of the burden of the VAT is still progressive over all the quintiles household expenditure.

Zero‐Rating versus Cash Transfers under the VAT

“…Generally, these findings are that the VAT is regressive when measured against income and proportional or progressive when measured against consumption; see Sahn and Younger (), Younger, Sahn and Dorosh (), Muñoz and Cho (), Decoster and Verbina (), Refaqat (), Jenkins, Jenkins and Kuo (), Lora (), Warren () and Decoster et al. ().…”

Value Added Tax and Consumer Spending: A Graphical Descriptive Analysis

“…However, it is not necessarily the case that a national sales tax cannot be progressive (Metcalf, 1997). In fact, the VAT system in the Dominican Republic has been found to be progressive (Jenkins, Jenkins and Kuo, 2006). Caspersen and Metcalf (1995) state that a value-added tax in the U.S. could be only mildly regressive or even progressive.…”

Income Inequality and Fiscal Policy

“…Taxes on imports, which continue to be important in low-income economies, often appear to be among the most regressive, while excise taxes-such as fuel, alcohol, and tobacco excises-tend to be progressive. Although the distributive impact of value-added taxes has been found to be mixed, there is strong evidence that the exemption of small businesses (including agriculture and the informal sector) can result in a progressive incidence (Jenkins, Jenkins, and Kuo, 2006).  Direct taxes: In general, personal income and property taxes in developing economies are progressive.…”