Christian A. Emini Torbjörn G. Jansson

Tariff revenues important for nat. budget Enforcing… requires QUESTION: Which tax to choose for VarTax? Options: Income tax vs. Consumption tax

Shock Closure: Choice of replacement tax Income taxConsumption tax Unilaterally for RICH: Output tax Input subsidies Multilaterally remove: Import tariffs Export subsidies PovRich0PovRich1

Differential poverty effect of reform Income tax is GENERALLY* better Why? * Not in Vietnam, but the difference is very small there

Income tax influences allocation less  Income tax is more efficient Utility generally higher with Income tax replacement Utility increases in all regions with income tax Then why was there no general poverty reduction?

Income tax as replacement tax Consumption tax as replacement tax Change in welfare Change in number of poor Change in welfare Change in number of poor 1 Thailand Vietnam Mozambique Mexico Brazil Malawi ? ? General opinion: Welfare and poverty vary in opposite directions But it could be misleading to limit analysis only to welfare impacts: A raise in welfare could lead in poverty worsening! A fall in welfare could lead in poverty alleviation!

Drivers of the poverty impacts Initial distribution around the poverty line The initial poverty gap (intensity of poverty) The pattern of consumption shares: with regard to change in prices of most consumed products Sources of income shares: with regard to change in factor returns The pattern of initial distortions and the nature of the replacement tax or shock

More efficiency is good for Welfare (and GDP) improvement But it is not automatically pro- poor This non triviality verified through tax replacement experiments justifies per se the importance to set a genuine poverty module within the model