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Medium-Term Effects of a Rise in VAT on Standard of Living and Inequality: A Microsimulation Approach

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  • Matthias André
  • Anne-Lise Biotteau

Abstract

[eng] A rise in VAT has both direct and delayed effects on standard of living and inequality. Such a rise translates into an increase in prices that same year. Earnings and other types of income are partly adjusted subsequently. The scales for social security benefits and direct taxes are also index-linked to inflation. This work offers an ex-ante evaluation of these mechanisms using the INES microsimulation model. Three years after a three-point rise in the standard rate of VAT, the standard of living, adjusted for VAT and spending on rent, would be 0.6% lower in real terms, on average, than if there had been no rise. This delayed effect equates to 45% of the initial effect. The poorest 10% of people suffer a relative fall in their adjusted standard of living three times greater than the rest of the population.

Suggested Citation

  • Matthias André & Anne-Lise Biotteau, 2021. "Medium-Term Effects of a Rise in VAT on Standard of Living and Inequality: A Microsimulation Approach," Economie et Statistique / Economics and Statistics, Institut National de la Statistique et des Etudes Economiques (INSEE), issue 522-523, pages 5-21.
    • Handle: RePEc:nse:ecosta:ecostat_2021_522d_1
    DOI: https://doi.org/10.24187/ecostat.2021.522d.2037
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    References listed on IDEAS

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    1. Mr. Stephan Danninger & Ms. Alina Carare, 2008. "Inflation Smoothing and the Modest Effect of VAT in Germany," IMF Working Papers 2008/175, International Monetary Fund.
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    More about this item

    JEL classification:

    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
    • I32 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - Measurement and Analysis of Poverty

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