Redistribution via VAT and cash transfers: an assessment in four low and middle income countries

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 ratessuch 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.

Adaptive social protection in Indonesia: Stress‐testing the effect of a natural disaster on poverty and vulnerability

“…They also recommend exploring options to remove VAT exemptions and instead use the additional revenue to finance social protection reforms (World Bank, 2019). This is in‐line with a growing recognition that VAT exemptions are a blunt way in which to provide support for low‐income households (Gcabo et al, 2019; Harris et al, 2018; Keen, 2013). These financing suggestions can also serve to fund disaster‐related emergency support.…”

Toward a green income support policy: investigating social and fiscal alternatives for Turkey

“…Taxes on consumption constitute the largest base of taxation, particularly in developing countries. They can serve as an administratively efficient source of a broad-based transfer policy (Harris et al 2018). Şahin and Kılıç (2021) run simulations for alternative BI schemes for Turkey financed solely by income taxes.…”

Tax and fiscal policy in response to the Coronavirus crisis: Strengthening confidence and resilience

“…Monetary policy options are more constrained for developing countries, and will require international coordination (G20 Framework Working Group, 2020 [14]). While some have cut interest rates, the scope to raise public debt is limited for many countries; 34 Low Income countries were already at high risk of, or already in, debt distress in November 2019 (IMF, 2019 [15]). As many developing countries borrow in foreign currencies, domestic currency depreciates, often at a faster rate than during the GFC, will further exacerbate the challenges for debt financing, increasing the cost of servicing even existing debt (UNCTAD, 2020 [8]),.…”