Abstract
The main purpose of this paper is to evaluate Value-Added Tax (VAT) effectiveness on income distribution in a group of selected countries with average revenue. One of the challenges of tax policymakers is to apply the VAT system despite its repressive effects. Although VAT is applied on all goods and services with the same rate, regardless of price elasticity and price elasticity of demand, the result is the transfer of the tax burden to consumers. Therefore, it opposes with the principle of tax equity and if overlooked, could end in distrust between taxpayers (consumers) and government and encourage people to evade paying taxes. The results of the study model using fixed effects and Generalized Method of Movement in middle-income selected countries during 1995-2015 showed that VAT has a significant and positive effect on the Gini coefficient as income distribution index. Increasing the VAT rate resulted in increasing the Gini coefficient and inequity. JEL Classification: C23, H21, E24
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