Research Snapshots

Tax revenues in low-income countries

Xuan Song Tam and colleagues quantitatively investigate the welfare costs of increasing tax revenues in low-income countries. They consider three tax instruments: consumption, labour income, and capital income taxes. The analysis is based on a general equilibrium model featuring heterogeneous agents, incomplete financial markets, and rural and urban areas. They calibrate the model to Ethiopia and decompose the welfare costs into their aggregate and distributional components. They find that changing taxes alter the composition of demand. This, together with limited labour mobility, causes the incidence of higher taxes to fall disproportionately on the rural population, regardless of the instrument. Consumption taxes are the instrument with the largest welfare loss.

Adrian Peralta-Alva, Xuan Song Tam, Xin Tang, and Marina M. Tavares "Tax Revenues in Low-income Countries" In: Economic Journal, forthcoming

Reference:
https://academic.oup.com/ej/article/133/653/2001/7078559