Tax Progressivity in Developing Countries: Redistributive Reforms to Indirect Taxation

Abstract

Developing countries’ tax systems are characterized by a very high reliance on indirect taxation and a very low (if any) progressivity. In this article, the author tries to provide a deeper analysis linking these two characteristics by exploring what actions are available for developing countries to increase their tax progressivity through their indirect taxes. He also analyses the potential distributional gains of three reforms to the VAT in developing countries. Using Chile as a case study, the analysis is based on empirical data on consumption patterns to assess the distributional impact of these reforms, finding that they have a strong redistributive potential to enhance the tax progressivity in developing countries. It also emphasises the importance of following evidenced-based tax reforms and not simply follow the indirect taxation policies of developed countries. The author draws comparisons with the UK VAT to highlight the need to take a different approach to regressivity concerns of indirect taxation.