The Macroeconomic and Distributional Implications of Fiscal Consolidations in Low-income Countries
This paper investigate fiscal consolidations through value added tax, personal income tax, and corporate income tax
Abstract
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.
This work is part of the ‘Macroeconomics in Low-income countries’ programme
Citation
Adrian Peralta-Alva, Marina Mendes Tavares, Xuan S. Tam and Xin Tang (2018) The Macroeconomic and Distributional Implications of Fiscal Consolidations in Low-income Countries. IMF Working Paper No. 18/146
Link
The Macroeconomic and Distributional Implications of Fiscal Consolidations in Low-income Countries