Informality, Consumption Taxes and Redistribution

Abstract

The version presented here is a Working Paper (or 'pre-print') that may be later published elsewhere.

The VAT at 100: A Retrospective Survey and Agenda for Future Research

“…In contrast, Bachas, Gadenne and Jensen (2021) suggest that the existence of a large informal sector makes the VAT more progressive, based on the evidence from consumption surveys in twenty different countries of varying income levels. They find that expenditure shares in the informal sector are negatively related to total household expenditure, which is their proxy for household income.…”

Building an Equitable Society in Colombia

“…10 Part of the regressivity of this tax is attenuated by the fact that in a context of high labor informality such as Colombia's, the VAT allows the tax net to be broadened by taxing consumption: the income from informal work or informal firms is not taxed when it is generated, but rather when it is consumed. Also, as Bachas, Gadenne, and Jensen (2020) show, in a context where informal points of sale exist, low-income individuals can access de facto VAT-free products, which reduces the weight of VAT for them. However, in Colombia, as in many other countries, the bulk of the attenuation is done through VAT exemptions and reduced rates.…”

Reassessing the regressivity of the VAT

“…It does not, therefore, consider the potential impact that informality -which is far more prevalent in developing countries -may have on VAT burdens. In this regard, recent research by Bachas, Gadenne and Jensen (2020) estimates informality Engel curves for 31 predominantly developing countries and finds that informality decreases as household expenditure increases, thereby creating a degree of progressivity in the VAT in developing countries. Similarly, Jenkins, Jenkins and Kuo (2006) find that informality creates progressivity in the VAT in the Dominican Republic.…”