For middle-income countries such as Tunisia that have the capacity to meaningfully tackle poverty and inequality using their domestic resources, it is essential that fiscal policy be redistributive while also remaining economically-efficient. A value-added tax (VAT) system with lower, or “preferential,” rates on certain essential products has been touted by some as a panacea. The purpose of this paper is to empirically test whether these preferential rates are truly redistributive. Specifically, this paper asks: “Would Tunisia abolishing preferential VAT rates to establish a flat-rate VAT system, in which all preferential rates are increased to match the primary rate, benefit the poorest of society if the increase in revenue is spent according to Tunisia’s existing social expenditure scheme?” I answer this question using a simulation model, which makes quantitative welfare predictions for each Tunisian income decile based on their monetary gain or
loss as a result of this hypothetical tax reform. The top- line finding of the analysis is that the bottom two deciles
are net winners of the reform while all other income deciles are net losers – they pay more in increased taxation than they receive back in increased social spending. I conclude that the reform is not sufficiently redistributive because the third decile, which falls under the USD$5.50 per day poverty line, is made worse off. Therefore, I do not recommend that this policy be implemented as proposed in the research question. However, the policy could be reformed in order to increase its progressivity and therefore better address poverty and inequality in a number of ways, including introducing the policy alongside social expenditure reform or only abolishing preferential VAT rates on products that are demand-inelastic with respect to price or those disproportionately consumed by the wealthy.
How to Cite:
Amlani, J., 2020. Can a flat-rate VAT promote redistribution? Assessing the impact of abolishing preferential VAT rates on Tunisia’s poor. The Public Sphere: Journal of Public Policy, 8(1).