The value added tax: annual vs. lifetime perspective evidence from Tanzania household data
Date
2009
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Abstract
The study compares the annual vs the lifetime perspective of the Value Added Tax (VAT) using the Tanzania Household Budget Survey of 2000/2001. The impact of exemptions on both government revenue and distribution of the tax burden is examined. The "distributional characteristics approach" is used to find whether exemptions are justifiable on distributional grounds. Finally the study examines changes in vertical equity of moving from the previous sales tax to the VAT. Results show that when annual income is used to measure well being, the VAT looks very regressive, while using "lifetime income" makes the VAT proportional. With lifetime income as a measure of ability to pay, incorporating exemptions into the analysis makes the VAT slightly progressive while several alternatives to exemptions could make the VAT more progressive and improve revenue performance. The distributional characteristics of exempted items show that unprocessed food, public transport and petroleum products are mostly consumed by the relatively poor. On the other hand, the rich consumes postal supplies, books, newspapers, and others. Comparing VAT and the previous sales tax shows VAT to be less progressive, even though it is not regressive.
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Subject
consumption
household
lifetime incidence
Tanzania
tax
value added tax
public policy