Haughton and Khandker
15
Example: Suppose a household gets $12,000 from wages, $800 for interest, and $2,500 from remittances, and assume there is a tax of 10 percent on interest and 8 percent on wages (after the first $5,000 annually). Then, under plausible assumptions about incidence, the direct tax burden on this household will be $640 (= 10% × $800 + 8% × ($12,000 – $5,000)). For indirect taxes—levied on expenditure—one needs solid information on household spending patterns, with a substantial degree of detail. Example: Suppose there is a VAT of 12 percent on all goods and services except food, and an additional tax of $0.25/liter on gasoline. Assume that the household spends $14,900 on purchases of goods and services, of which $600 goes to buy 1,000 liters of gasoline and $8,100 on food. Note that these are tax-inclusive numbers. Then, assuming that the incidence of these taxes falls on the consumer, the tax paid by this household will be $951.79.2 If the goal is to assess the incidence of the tax system, then it is necessary to have household survey data with relatively detailed information both on income and on expenditures. Some surveys collect good information on one, but not both, of these categories. In practice, tax incidence analysis requires access to the original survey data, and cannot be done satisfactorily with secondary data such as tables published in statistical abstracts, since the latter rarely show income and expenditure data together.
Case Study: VAT in Peru
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Table 15.3 and figure 15.3 provide information on the incidence of the VAT in Peru in 2000. At that time, the tax rate was 18 percent, although the effective rate (on taxable items) was closer to 16 percent, and actual collections represented just 7.3 percent of household expenditure nationwide. The VAT is by far the most important single tax in Peru, generating more than two-fifths of tax revenue in 2000. When households are sorted by expenditure per capita, the VAT appears to be roughly proportional, or perhaps slightly regressive (the Kakwani measure of progressivity is –0.015), but the potential for making the tax system more progressive by lowering VAT rates is quite minimal, as reflected in the small magnitude of the ReynoldsSmolensky measure (RS2 = –0.00125). However, if the incidence of the tax is measured relative to income per capita instead of expenditure per capita, this tax appears to be highly regressive; we return to this point below. The approach outlined above gives the incidence of existing taxes at a point in time. But often the analyst is interested in tracing the distributional effects of a change in taxes. Usually this is not difficult: for instance, if the wage tax is to be