Can the suppression of VAT exemption support the poor? The case of Niger

The existing relation between the increase in public revenues and the establishment of effective anti-poverty programs is not always confirmed in the short term as studied by Filmer and al. (1998) and Gauthier (2007). With this observation and in a national and international context of poverty fighting, it is important to assess the social impacts of fiscal reform and to know whether reinforcing public revenues might hamper efforts made to reduce poverty. This enables the hypothesis that the social objectives of the country should be taken into account right from the definition of the characteristics of public tax collection. In order to have the public resources necessary for its development, Niger is examining the possibility of expanding its VAT tax base to exempted goods and basic food products. This proposition has prompted violent opposition. In this context, we have to analyze the impact of the end of exemptions and define in what way a VAT structure could support the poor. The first micro-macro computable general equilibrium model of Niger's actual economy has been developed to shows the net social impacts of the end of exemption. This model allows analysis of the social impact and distributional of the following VAT structures: a pure VAT structure, a structure maintaining certain exemptions, and a multiple-rate VAT structure. To take into account household heterogeneity of household, a micro-simulation model is associated with the CGE model (Decaluwe, 1999 ou Savard, 2005). The principle of “Equal Yield Tax Analysis ” (Shoven and al., 1990) is made for the simulations. It aims to compare various taxation schemes while keeping constant the public expenditure and the State revenue. This analytical approach is fitted to capture the intrinsic incidence of alternative tax scenarios by isolating them from induced effects which may be related to the change in the State revenue, the State expenditures and savings. The model has been run firstly with perfect competition hypothesis and secondly with various market structure. The model’s results shows that although restoring the VAT rate would be socially costly compared to the initial situation, the distributional impact of the VAT differs according to the system implemented in the country. Maintaining VAT exemptions in food crop agriculture sectors associated with a tax base expansion in the remaining sectors will increase public revenue while taking into account the national goal of poverty reduction. The net social impact of exoneration depends on the economic structure of the concerned sector. If the national goal is the end of exemption, the model shows that applying a pure VAT conforming to the theory is preferable in terms of economic growth whereas applying a reduced-rate on food crop agriculture lightens the social impact of the end of exemptions compared to a single rate.