Redistributing Income through VAT

Abstract

This article analyzes from a theoretical point of view the incidence of the value added tax on the current expenditure and income of the households when applying reduced rates and exceptions from this tax for some prevalent goods from the consumption of households with small income. The replacement of the standard VAT rate with reduced rates and exemptions for such goods reduces the regressive character of this tax related to the current income (and increases the progressivity degree of the tax in relation to the current expenditures of households), when the size and the structure of consumption remains unchanged.

Keywords

• tax
• regressive
• income
• expenditure