The Macroeconomic and Distributional Implications of Fiscal Consolidations in Low-Income Countries

37 Pages Posted: 1 Aug 2018

See all articles by Adrian Peralta-Alva

Adrian Peralta-Alva

Federal Reserve Bank of St. Louis

Marina Mendes Tavares

Instituto Tecnológico Autónomo de México (ITAM)

Xuan S. Tam

City University of Hong Kong

Xin Tang

International Monetary Fund (IMF)

Date Written: June 2018

Abstract

We quantitatively investigate the macroeconomic and distributional impacts of fiscal consolidations in low-income countries (LICs) through value added tax (VAT), personal income tax (PIT), and corporate income tax (CIT). We extend the standard heterogeneous agents incomplete markets model by including multiple sectors and rural-urban distinction to capture salient features of LICs. We find that overall, VAT has the least efficiency costs but is highly regressive, while PIT impacts the economy in the opposite way with CIT staying in between. Cash transfers targeting rural households mitigate the negative distributional impacts of VAT most effectively, while public investment leads to little redistribution.

Keywords: Fiscal consolidation, Value added taxes, Personal income taxes, Corporate income taxes, Income distribution, Poverty and inequality, Low-income developing countries, Fiscal Consolidations, Inequality, Low-income Countries, Personal Income and Wealth Distribution

JEL Classification: D31, E62, H23

Suggested Citation

Peralta-Alva, Adrian and Mendes Tavares, Marina and Tam, Xuan S. and Tang, Xin, The Macroeconomic and Distributional Implications of Fiscal Consolidations in Low-Income Countries (June 2018). IMF Working Paper No. 18/146. Available at SSRN: https://ssrn.com/abstract=3221236

Adrian Peralta-Alva (Contact Author)

Federal Reserve Bank of St. Louis ( email )

411 Locust St
Saint Louis, MO 63011
United States

HOME PAGE: http://research.stlouisfed.org/econ/peralta-alva/index.html

Marina Mendes Tavares

Instituto Tecnológico Autónomo de México (ITAM) ( email )

Av. Camino a Sta. Teresa 930
Col. Héroes de Padierna
Mexico City, D.F. 01000, Federal District 01080
Mexico

Xuan S. Tam

City University of Hong Kong ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong

Xin Tang

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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