The Macroeconomic and Distributional Implications of Fiscal Consolidations in Low-Income Countries
37 Pages Posted: 1 Aug 2018
Date Written: June 2018
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: Suggested Citation