Is the Value Added Tax Naturally Progressive?

24 Pages Posted: 27 Apr 2006  

Glenn P. Jenkins

Queen's University - Department of Economics; Eastern Mediterranean University

Hatice P. Jenkins

Eastern Mediterranean University - Department of Banking and Finance

Chun Yan Kuo

Queen's University - Department of Economics

Date Written: April 18, 2006

Abstract

A broad based consumption tax, such as a value added tax, is generally considered to be a regressive tax. This conclusion, however, has not taken into account the fact that in developing countries the commodities on which poor households spend most of their income, even if they are included in the legal tax base, are administratively impractical to tax. This paper employs a rich data set on household incomes and expenditures for the Dominican Republic. The data set covers 2042 goods and services purchased by households of different income and consumption levels. It also contains information on the type of establishment from which the items were purchased. With this information we estimate the effective rate of tax that has been paid on each item purchased by households. These estimations include the effect of the different rates of the tax compliance across households with different expenditure levels. The results of the study show that the burden of the current VAT in the Dominican Republic is progressive over all the quintiles of household expenditure. Furthermore, if the base of the VAT is made comprehensive, the estimated incidence of the burden of the VAT is still progressive over all the quintiles household expenditure.

Keywords: Value Added Tax, incidence, compliance

JEL Classification: H22, H26

Suggested Citation

Jenkins, Glenn P. and Jenkins, Hatice P. and Kuo, Chun Yan, Is the Value Added Tax Naturally Progressive? (April 18, 2006). Available at SSRN: https://ssrn.com/abstract=897677 or http://dx.doi.org/10.2139/ssrn.897677

Glenn P. Jenkins (Contact Author)

Queen's University - Department of Economics ( email )

99 University Avenue
Kingston K7L 3N6, Ontario
Canada K7L 3N6
613 533 6556 (Phone)
613 533 6818 (Fax)

Eastern Mediterranean University

Gazimagusa, Mersin 10
Turkey

Hatice P. Jenkins

Eastern Mediterranean University - Department of Banking and Finance ( email )

Gazimagusa, via Mersin-10
Turkey
+90 392 630 2394 (Phone)
+90 392 365 2025 (Fax)

Chun Yan Kuo

Queen's University - Department of Economics ( email )

99 University Avenue
Kingston K7L 3N6, Ontario
Canada K7L 3N6

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