Indirect Tax Incidence in Madagascar: Updated Estimates Using the Input-Output Table

Abstract

This paper uses a new method based on both household survey data and an input-output table to assess tax incidence in Madagascar, with special emphasis on taxes that fall primarily on intermediate inputs rather than final goods and services. We use this method to analyze the impact of Madagascar's recent tax reforms. We find that the direct effects of Madagascar's changes in tax policy in the late 1990s were not regressive. Changes in indirect taxes were roughly neutral, while the increasing share of direct taxes on wages in households' overall tax burden made the system slightly more progressive. The one major tax change that was regressive was the increase in taxes on kerosene, a product with a very low income elasticity of demand. Despite this conclusion, we do find that the burden of taxes in Madagascar shifted toward the poor. This was not due to changes in tax policy, but rather to a shift in the pattern of consumption of the poor out of lightly taxed food and informal sector items and into more heavily taxed formal sector goods. This may be a consequence of the poor's improved standard of living, which brings with it a greater (relative) share of the tax burden. In terms of methods, we have found that using the input-output table to map taxes on intermediate inputs to final consumers makes a significant difference in our analysis of tax incidence. In particular, petroleum duties, especially those on gasoline and diesel, are significantly less progressive than the pattern of final consumption suggests. Nevertheless, taxes on gasoline and diesel (but not kerosene) remain among the most progressive taxes in Madagascar, even after accounting for the indirect effects on the prices of goods that use these products as intermediate inputs.