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Introduction and Summary of Poverty and Well-Being in East Africa: A Multifaceted Economic Approach Read chapter Read first chapter

2016 | OriginalPaper | Chapter

8. Evaluation of Redistributive and Welfare Impacts of Indirect Taxes Reform in Rwanda

Authors : Etienne Ndemezo, Francis Menjo Baye

Published in: Poverty and Well-Being in East Africa

Publisher: Springer International Publishing

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Abstract

This study evaluates the redistributive and welfare effects of reforms in indirect taxes in Rwanda. Specifically, its aim is to determine the effects of the 2002 reforms of the value added tax (VAT) rate on aggregate household welfare; assessing the impact of this reform on welfare distribution among Rwandan households; and evaluating the redistributive potential of differentiated indirect taxes in the country. A methodology based on two complementary approaches was used: a framework of the distributional characteristic of goods (Newberry 1995) and the framework of the marginal tax reforms (Ahmad and Stern 1984). Data used are from the second Integrated Survey on the Living Standards of Rwandan Households (EICV2) conducted by the government’s statistics office in 2005–06. The results show that: (1) the 2002 increase in the VAT rate slightly decreased aggregate household welfare; (2) the reforms further affected the welfare of households in the first three quintiles because they consumed relatively more of taxable necessities; and (3) differentiated indirect taxes could improve Rwandan household welfare without compromising on tax revenues.

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previous chapter Determinants of Consumption Expenditure and Poverty Dynamics in Urban Ethiopia: Evidence from Panel Data
next chapter On the Measurement of Multidimensional Well-Being in Some Countries in Eastern and Southern Africa
Appendix
Available only for authorised users
Footnotes
1
Measured in household expenditure, the inequality was valued around 0.5 of the Gini Index from 2000 to 2011. About 60 and 57 % Rwandans were considered poor respectively in 2000–01 and in 2005–06.
 
2
See details about the derivation of the change in indirect tax revenue with respect to the indirect tax rate in the Appendix.
 
3
The micro-simulation procedure was done using the following formula:\( E_{i1} = E_{i0} \left\{ {\left. {1 + \left[ {{{\left( {\pi_{i1} - \pi_{i0} } \right)} \mathord{\left/ {\vphantom {{\left( {\pi_{i1} - \pi_{i0} } \right)} {\left( {1 + \pi_{i0} } \right)}}} \right. \kern-0pt} {\left( {1 + \pi_{i0} } \right)}}} \right]\zeta_{ii}^{c} } \right\}} \right.\) where E i0 and E i1 are expenditures on good i before and after the indirect tax reform. Variables \(\pi_{i0} {\text{and}} \pi_{i1}\) represent the implicit tax rate on good i before and after the tax reform respectively; whereas \(\zeta_{ii}^{c} \) is the elasticity of expenditure on good i with respect to the price of good i.
 
4
The implicit tax rate is computed referring to the effect of combined indirect taxes (VAT and excise) on final prices: \( q = \left( {1 + \upsilon } \right)\left( {1 + \tau } \right)p \) where \( q \) is the final price tax-included and \( p \) is the final price tax-excluded, \( \upsilon \) is the VAT rate and \( \tau \) the excise duty rate. Consequently, the implicit tax rate can be calculated as: \( 1 + \pi = \left( {1 + \upsilon } \right)\left( {1 + \tau } \right) \) or \( \pi = \upsilon + \tau + \tau \upsilon \) where all variables are defined as previously.
 
5
Goods consumed relatively more by poor people.
 
6
See parameters of demand for goods in the Appendix.
 
7
Agricultural foods occupy roughly 19 % of ultra-poor consumption, while the national average is 4 % of all households’ expenditure.
 
8
Public transportation and education represent 8 and 11 % of the fourth quintile consumption respectively; the national average is 8 and 16 % respectively.
 
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Metadata
Title
Evaluation of Redistributive and Welfare Impacts of Indirect Taxes Reform in Rwanda
Authors
Etienne Ndemezo
Francis Menjo Baye
Copyright Year
2016
Book
Poverty and Well-Being in East Africa

Print ISBN: 978-3-319-30980-4

Electronic ISBN: 978-3-319-30981-1

Copyright Year: 2016

DOI
https://doi.org/10.1007/978-3-319-30981-1_8

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