VATs are better suited to low-income countries – they actually widen inequalities in developed ones
By Kaisa Alavuotunki, Mika Haapanen, and Jukka Pirttilä, January 2017, The Consequences of the Value-Added Tax on Inequality, https://deliverypdf.ssrn.com/delivery.php?ID=903006029020064077119004121077105029024042049020026087093008118026067011125091113112098012030034041017014080084101124120114018040081009023072025112017103104091124067064018115115090113068090027115122096108121087003126006095077117126073002085111084120&EXT=pdf&INDEX=TRUE, cmh
Our results, stemming from OLS and instrumental variable regressions, suggest that on average, VAT adoption has not necessarily led to increased inequality. However, we have found fairly robust evidence25 that when inequality is measured based on disposable income, countries with the VAT have experienced increases in inequality, whereas in countries where inequality is measured based on consumption, inequality has not increased following VAT adoption. The countries where inequality is measured using income-based Gini are more often high-income countries, and the results therefore suggest that for low-income countries, there is no evidence that the VAT would have led to widening welfare disparities. Admittedly, in the absence of income-based measurement of inequality for these countries, the impact of the VAT on income inequality cannot be examined.