International Tax Dialogue Parallel Session 2: Policy Equity issues VAT and trade liberalization VAT and small islands

International Tax Dialogue EQUITY Basic argument: VAT rate differentiation a blunt instrument for equity objectives so better to preserve revenue and use targeted spending instrument

International Tax Dialogue Suppose: Rich have ten times the income of poor Poor spend 50 percent of their income on food, rich spend 20 percent Equal numbers of rich and poor Then: For each $100 of VAT revenue foregone by lowering VAT rate on food, only $20 reaches poor Question then is: If we had $100 to spend, could we do it in such a way that poor receive more than $20?

International Tax Dialogue Also: Threshold favors small traders Reaches informal sector on inputs (like tariffs) Evidence? Suggests that VAT in developing countries not especially regressive (no more so than tariffs)....reflecting exemptions

International Tax Dialogue SMALL ISLANDS VAT works well....but so do tariffs. Issue is: Where most consumption is imported, and little domestic valued-added, is there much gain in moving from tariffs to a VAT plus a few excises?