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Policy Paper

Can a flat-rate VAT promote redistribution? Assessing the impact of abolishing preferential VAT rates on Tunisia’s poor

Author:

Jenna Amlani

GB
About Jenna

Master or Public Administration,
Class of 2019
London School of Economics and Political Science

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Abstract

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).
Published on 20 Mar 2020.
Peer Reviewed

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