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

By Adrian Peralta Alva, Marina Mendes Tavares, Xuan S. Tam, Xin Tang

June 13, 2018

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Adrian Peralta Alva, Marina Mendes Tavares, Xuan S. Tam, and Xin Tang. The Macroeconomic and Distributional Implications of Fiscal Consolidations in Low-income Countries, (USA: International Monetary Fund, 2018) accessed June 23, 2025

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

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.

Subject: Consumption, Economic sectors, Income, Manufacturing, National accounts, Revenue administration, Taxes, Value-added tax

Keywords: Clearing condition, Consumption, Consumption expenditure, Consumption goods, Consumption-saving decision, Fiscal Consolidations, Gini coefficient, Goods consumption, Income, Inequality, Low-income Countries, Manufacturing, Production function, Transfer program, Value-added tax, WP

Publication Details

Pages:

36
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2018/146
Stock No:

WPIEA2018146
ISBN:

9781484363034
ISSN:

1018-5941

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