Can the removal of VAT Exemptions support the Poor? The case of Niger

What is the best pro-poor value-added tax (VAT) design to increase public revenue in developing countries: A perfect uniform tax, a multiple-rate system, or a tighter tax base with a high rate? This debate remains relevant, even though many studies have analyzed the economic impact of VAT reforms. Most of these studies have considered VAT as a consumption tax when analyzing the social impact of VAT reforms. However, if VAT exemptions are implemented or if the tax administration is inefficient in issuing refunds for VAT credits, then VAT increases producer’s tax burden and viewing the VAT only as a consumption tax becomes inaccurate. In order to take into account these complexities we built the first micro-macro computable general equilibrium model of Niger’s economy in order to shed some light on the best pro-poor VAT design. The main result of the model reveals that broadening the tax base while maintaining a high VAT rate will lead to an important increase in poverty. Lowering the rate or maintaining exemptions on agricultural goods have the least impact on poverty. However, the social impact of exemptions depends on the net effect of the additional tax burden supported by producers and the increase in domestic demand.