The Macroeconomic and Distributional Implications of Fiscal Consolidations in Low-income Countries
IMF Working Papers, June 13, 2018
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Bibliographic details
- Authors: Marina Mendes Tavares, Xuan S. Tam, Xin Tang
- Published: June 13, 2018
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781484363034.001
Summary and methodology
- Quantitatively investigates 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).
- Extends the standard heterogeneous agents incomplete markets model by including multiple sectors and rural-urban distinction to capture salient features of LICs.
Key findings
- VAT has the least efficiency costs but is highly regressive.
- PIT impacts the economy in the opposite way (i.e., less regressive, higher efficiency costs relative to VAT).
- CIT effects lie between VAT and PIT in terms of efficiency and distributional outcomes.
- Cash transfers targeting rural households mitigate the negative distributional impacts of VAT most effectively.
- Public investment leads to little redistribution.
Thematic implications
- Efficiency versus equity trade-offs differ by tax instrument:
- VAT: lower efficiency cost, higher regressivity.
- PIT: higher efficiency cost, less regressive impact.
- CIT: intermediate outcomes.
- Targeted social policy can offset distributional harms of consumption-based tax reforms more effectively than reorienting public investment.
Policy recommendations
- When fiscal consolidations rely on VAT increases, pair them with cash transfers targeted to rural households to mitigate regressivity.
- Recognize that public investment reallocations are unlikely to produce significant redistribution in the short run.
- Consider the differing macroeconomic and distributional footprints of VAT, PIT, and CIT when designing consolidation packages in LICs.
Source: "The Macroeconomic and Distributional Implications of Fiscal Consolidations in Low-income Countries", IMF Working Paper by Marina Mendes Tavares, Xuan S. Tam, and Xin Tang, June 13, 2018.
Content in this bundle
- The Welfare Implications of Fiscal Consolidations in Low-income Countries, WP/18/146, June 2018