Zero‐Rating versus Cash Transfers under the VAT

Oordt, Marius van

doi:10.1111/1475-5890.12168

Cited by 10 publications

(10 citation statements)

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“…This scenario is consistent with evidence that most households do not meet the dietary guidelines for consumption of fruits and vegetables [24]. Moreover, evidence notes that zero-rating goods is more effective to induce changes in retail prices compared to a tax exemption [58]. Our final policy combines the two earlier policies.…”

Section: Simulation Scenariossupporting

confidence: 81%

Combined fiscal policies to promote healthier diets: Effects on purchases and consumer welfare

et al. 2020

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Taxes on unhealthy foods and sweetened beverages, as well as subsidies to healthy foods, have become increasingly popular strategies to curb obesity and related non-communicable diseases. The existing evidence on the welfare effects of such fiscal policies is mixed and almost uniquely focused on tax schemes. Using the 2016-2017 Chilean Household Budget Survey, we estimate a censored Exact Affine Stone Index (EASI) incomplete demand system and simulate changes in purchases, tax incidence, and consumer welfare of three different policy scenarios: (1) a 5 percentage point additional tax on sweetened beverages (currently taxed at 18%) and a new 18% tax on sweets and snacks, (2) a healthy subsidy by zero-rating fruits and vegetables from the current 19% value-added tax, and (3) a combined (tax plus subsidy) policy. Under full pass-through of these policies, the combined scheme captures the incentives to switch purchases from both single-policy alternatives, resulting in a net welfare gain and subsidy transfer for the average Chilean household. In terms of welfare, low-income households strictly benefit from a combined policy, while high-income households experience a small consumer welfare loss, resulting in re-distributional effects.

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Section: Simulation Scenariossupporting

confidence: 81%

Combined fiscal policies to promote healthier diets: Effects on purchases and consumer welfare

et al. 2020

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“…Keen 2013;Harris et al 2018) and in South Africa (e.g. Jansen and Calitz 2015;van Oordt 2018). The hypothetical scenarios also respond to the call made on constitutional grounds by the SAHRC (2018) and others to broaden the social security coverage to mitigate the impact of the VAT hike.…”

Section: Discussionmentioning

confidence: 98%

Modelling value-added tax (VAT) in South Africa: Assessing the distributional impact of the recent increase in the VAT rate and options for redress through the benefits system

Gcabo¹,

Moche²,

Steyn³

et al. 2019

WIDER Working Paper

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Abstract: Using SAMOD, a tax-benefit microsimulation model for South Africa, this paper examines the joint distributional impact of the increase in the value-added tax (VAT) rate and increases in benefit amounts in 2018. Although poverty and inequality did not increase overall, the poorest still saw a reduction in their purchasing power, as many of those in the lowest decile do not receive any social benefits. The paper then explores the consequences of eliminating zero-rating in VAT and using the generated revenues to finance new social benefits. The results suggest that a policy package of a uniform VAT and an expanded set of social benefits would lead to reduced poverty and inequality in comparison to the current practice of zero rating of some consumption goods in the VAT. The findings demonstrate the superiority of using direct taxes and benefits as opposed to provisions in indirect taxes in achieving redistribution.

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“…Cseres-Gergely et al (2017) use their QUAIDS model for Hungary to simulate the introduction of a range of potential policy measures to help poorer households, finding that an income transfer to the unemployed would be better targeted at the poor than reduced VAT rates on food. Van Oordt (2018) uses a QUAIDS model for South Africa to simulate removing reduced VAT rates and using the revenue to extend existing cash transfers. He finds that low-and middle-income households would benefit from the reform, while high-income households would lose.…”

Section: Previous Research On the Distributional Effects Of The Vatmentioning

confidence: 99%

“…These studies generally use microsimulation models to simulate reforms that remove reduced VAT rates and introduce new, or extend existing, cash transfer programs. With two exceptions (Cseres-Gergely, 2017, andVan Oordt, 2018), these studies do not take account of behavioural responses to the removal of reduced VAT rates. Davis and Kay (1985) use 1982 household expenditure microdata for the United Kingdom to simulate a reform that uses the revenue generated from removing zero rates and exemptions to increase income tax thresholds, the child benefit and pensions.…”

Section: Literature Reviewmentioning

confidence: 99%

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The Distributional Effects of Value-Added Taxes in OECD Countries

Thomas¹

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<p>Most OECD countries’ value-added tax (VAT) systems apply reduced VAT rates to a selection of expenditure items in order to achieve distributional goals, and – to a lesser extent – social, cultural and employment-related goals. This thesis investigates the distributional effects of the VAT in OECD countries, and the merits of using reduced VAT rates to achieve distributional goals. The research adopts a microsimulation modelling approach that draws on household expenditure microdata from household budget surveys for an unprecedented 27 OECD countries. A consistent microsimulation methodology is adopted to ensure cross-country comparability of results. Non-behavioural VAT microsimulation models are first built to examine the overall distributional impact of the current VAT systems in each country. The research assesses the competing methodological approaches used in previous studies, highlighting the misleading effect of savings patterns on cross-sectional analysis when VAT burdens are measured relative to income. Measuring VAT burdens relative to expenditure – thereby removing the influence of savings – is found to provide a more reliable picture of the distributional impact of the VAT. On this basis, the VAT is found to be either roughly proportional or slightly progressive in most of the 27 OECD countries examined. Nevertheless, results for a small number of countries (Chile, Hungary, Latvia and New Zealand) highlight that broad-based VAT systems that have few reduced VAT rates or exemptions can produce a small degree of regressivity. Results also show that even a roughly proportional VAT can still have significant equity implications for the poor – potentially pushing some households into poverty. Behavioural VAT microsimulation models are then built for 23 OECD countries to investigate whether reduced VAT rates are an effective way to support poorer households, and whether the use of targeted cash transfers would be more effective. The behavioural microsimulation methodology follows the Linear Expenditure System based approach of Creedy and Sleeman (2006). Complementing this approach, a Quadratic Almost Ideal Demand System (QUAIDS) is estimated specifically for New Zealand, thereby providing the first estimates of a QUAIDS model based on New Zealand data. Simulation results show that, as a whole, the reduced VAT rates present in most OECD countries tend to have a small progressive impact. However, despite this progressivity, reduced VAT rates are shown to be a highly ineffective mechanism for targeting support to poorer households: not only do rich households benefit from reduced rates, but they benefit more in aggregate terms than poor households do. When looking at reduced VAT rates applied to specific products, results are found to vary considerably. Reduced VAT rates specifically introduced to support the poor (such as reduced rates on food consumed at home and domestic utilities) are generally found to have a progressive impact, though rich households still receive a larger aggregate benefit than poor households. In contrast, reduced VAT rates introduced to address non-distributional goals (such as reduced rates on restaurants, hotels, and cultural and social expenditure) often have a regressive impact. Additional simulation results show that an income-tested cash transfer will better target support to poorer households than reduced VAT rates in all countries. Furthermore, even a universal cash transfer is found to better target poorer households than reduced VAT rates. However, results also show that it is very difficult for an income-tested cash transfer to fully compensate all poor households for the removal of reduced VAT rates. This is due to the significant variation in the underlying consumption patterns across households. While a small number of poor households lose out from replacing reduced VAT rates with targeted cash transfers, those that receive support are instead determined by income and family characteristics as opposed to consumption tastes – thereby increasing horizontal equity. Furthermore, many households are lifted out of poverty as revenue previously transferred to richer households is now transferred to poorer households. These results empirically confirm the theoretical expectation that, where available, direct mechanisms (whether via the income tax or benefit system) will better achieve distributional goals than reduced VAT rates. Countries that currently employ reduced VAT rates to achieve distributional goals should therefore consider removing these reduced rates and adjusting their income tax or benefit systems to achieve these distributional goals instead. Countries should also consider removing reduced VAT rates aimed at non-distributional goals where a more effective instrument is available to achieve the particular policy goal. At a minimum, the merits of these reduced VAT rates should be reassessed in light of their negative distributional impact.</p>

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Zero‐Rating versus Cash Transfers under the VAT

Cited by 10 publications

References 24 publications

Combined fiscal policies to promote healthier diets: Effects on purchases and consumer welfare

Combined fiscal policies to promote healthier diets: Effects on purchases and consumer welfare

Modelling value-added tax (VAT) in South Africa: Assessing the distributional impact of the recent increase in the VAT rate and options for redress through the benefits system

The Distributional Effects of Value-Added Taxes in OECD Countries

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