IMF Working Papers

The Macroeconomic and Distributional Implications of Fiscal Consolidations in Low-income Countries

Author/Editor:

Adrian Peralta-Alva ; Marina Mendes Tavares ; Xuan S. Tam ; Xin Tang

Publication Date:

June 13, 2018

Electronic Access:

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Summary:

We quantitatively investigate the macroeconomic and distributional impacts of fiscal consolidations in low-income countries (LICs) through value added tax (VAT), personal income tax (PIT), and corporate income tax (CIT). We extend the standard heterogeneous agents incomplete markets model by including multiple sectors and rural-urban distinction to capture salient features of LICs. We find that overall, VAT has the least efficiency costs but is highly regressive, while PIT impacts the economy in the opposite way with CIT staying in between. Cash transfers targeting rural households mitigate the negative distributional impacts of VAT most effectively, while public investment leads to little redistribution.

Series:

Working Paper No. 18/146

Subject:

Corporate income taxes Fiscal consolidation Income distribution Low-income developing countries Personal income taxes Poverty and inequality Value added taxes