Christian A. EminiTorbjörn G. Jansson

Tariff revenues important for nat. budgetEnforcing…

requires

QUESTION: Which tax to choose for VarTax?Options: Income tax vs. Consumption tax

ConstINCOME

TAXES

ConstINCOME

VarTaxFixTaxFIXt

t

Sh

ock

Closure: Choice of replacement tax

Income tax Consumption tax

Unilaterally for RICH:Output tax

Input subsidiesMultilaterally remove:

Import tariffsExport subsidies

PovRich0 PovRich1

Differential poverty effect of reform

Income tax is GENERALLY* better

Why?

-100 -50 0 50

Mexico

Brazil

Thailand

Vietnam

Mozambique

Malawi

Change in poverty (1000 cap)

DIFF (Consumption - Income)

Consumption tax

Income tax

* Not in Vietnam, but the difference is very small there

Income tax influences allocation lessIncome tax is more

efficientUtility generally higher

with Income tax replacement

Utility increases in all regions with income tax

Then why was there no general poverty reduction? -0.6 -0.4 -0.2 0 0.2 0.4 0.6 0.8 1 1.2

Mexico

Brazil

Thailand

Vietnam

Mozambique

Malawi

Income tax Consumption tax DIFF (Consumption - Income)

Income tax as replacement tax

Consumption tax as replacement tax

Change in welfare

Change in number of

poorChange in

welfare

Change in number of

poor

1 Thailand 1.758 -0.099 0.800 -0.087

2 Vietnam 0.303 -0.013 0.280 -0.017

3 Mozambique 0.843 -0.026 -0.100 -0.006

4 Mexico 0.076 0.019 0.080 0.024

5 Brazil 1.059 0.020 0.910 0.047

6 Malawi 4.649 0.006 4.470 0.011

??

•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!

0

5

10

15

20

25

30

35

0 1 2 3 4 5

Quintiles

We

lfa

re -

Co

ns

um

pti

on

Poverty Line

15 poor people

10 non poor people

0

5

10

15

20

25

30

35

0 1 2 3 4 5

Quintiles

Wel

fare

- C

on

sum

pti

on

Poverty Line

16 poor people

9 non poor people

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