Advancing Inclusive Growth in Cambodia

IMF Working Papers, September 6, 2019

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Evaluates the impact of fiscal reforms on growth and inequality in Cambodia using a calibrated general equilibrium model with heterogeneous agents (Peralta-Alva et al., 2018).
Uses the model to evaluate the growth and inequality impact of reforms that increase infrastructure spending by raising:
- (i) VAT,
- (ii) property tax, or
- (iii) personal income tax.

Over the last two decades:
- Cambodia’s consumption inequality and poverty have declined.
- Income inequality is higher, and large gaps remain between urban and rural residents.
Domestic revenue mobilization has improved substantially, but collection of tax revenue is biased towards non-progressive sources.
Reform outcomes from the model:
- Using property taxes delivers the largest increase in GDP and reduction in inequality.
- Reaping the gains from property taxation will however require additional investments in tax administration.

To maximize growth and equity gains from increased infrastructure spending, prioritize property taxation as the revenue source.
Complement property tax reforms with investments in tax administration to realize projected GDP gains and inequality reductions.
Consider distributional effects when choosing between VAT, property tax, and personal income tax as revenue instruments for infrastructure financing.