The CP alone causes inequality, but inclusion of the BI solves.

Existing cash transfer schemes are targeted more at households towards the bottom of the consumption distribution (e.g. those that are in poverty). However, they may not provide a suitable means of compensating households for the reduction in purchasing power they would face if the VAT base was broadened. The schemes remain relatively small-scale and tend to target subsets of the poorest parts of the population, often based on specific demographic or geographic eligibility criteria. Furthermore, the difficulty of implementing an effective targeting mechanism means that such programmes are generally subject to large inclusion and exclusion errors. Significant increases in the scale and coverage of such schemes would be required to offset the negative impact of VAT base broadening on households with low and middling levels of consumption. In these countries that is those below or close to the $1.90 and $3.20 international poverty lines.

A UBI/demogrant may provide an alternative means of compensating for a VAT rise. Our results indicate that broadening the VAT base and using the revenue to fund a UBI would boost the consumption of the least well off households and reduce extreme poverty and inequality – even if only 75% of the additional revenue was used for this purpose.19 There is of course a question of practicality with regards to the ability of LMIC governments to administer a nationwide cash transfer programme given administrative and information constraints. However, crucially such a programme would not require any targeting – only good registries of the population and reliable mechanisms for ensuring money reached intended beneficiaries. The fact that LMIC governments are increasingly able to manage more complex schemes that do require targeting suggests that this might not be an insurmountable challenge.