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The Annals of Regional Science

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01.01.2014 | Original Paper

Pro-poor tax policy and yardstick competition: a spatial investigation for VAT relief on food in Brazil

verfasst von: Enlinson Mattos, Ricardo Politi

Erschienen in: The Annals of Regional Science | Ausgabe 1/2014

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Abstract

This paper investigates whether a pro-poor tax policy follows yardstick competition in the value-added tax (VAT) base in Brazilian states. We explore an institutional arrangement that allows lower levels of government to set tax relief (tax cuts and exemptions) for food goods in a so-called basic basket food. Next, we examine the relationship between the VAT and the ‘Fund Against Poverty’ (FAP) financed by VAT rate increases on cigarettes and gas. Our findings indicate that the state tax function responds positively to the neighbour’s redistributive policy. Moreover, we estimate that the degree of spatial tax interaction among states has increased since the establishment of the FAP, suggesting that FAP resources are viewed as a complementary pro-poor policy rather than either a fiscal equalisation (substitute policy) or a possible slackness in the constraint of redistributive policies.

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One exception is the work of Saavedra (2000), which tests for spatial dependence in cash transfer programs in the USA (Aid to Families with Dependent Children—AFDC,) and finds a positive slope for the states’ reaction functions. As Brueckner and Saavedra (2001) note, there are various explanations that can be invoked to justify the investigation of government interactions.

Taxed services include telecommunications and electricity suppliers. The tax is collected by both upstream and downstream industries. The ICMS follows the invoice credit mechanism, according to which taxpayers are allowed a credit for tax collected at previous stages in the production chain. This mechanism avoids double taxation and characterises a VAT. However, no tax credit is allowed when inputs are tax exempt.

There were also three federal fees. However, these fees were levied on corporate revenues and did not change during the period under analysis. On 8 March 2013, the federal government announced tax relief on the basic food basket for all three federal fees.

For example, in 2006, although Paraiba State had no commodities with special tax treatment (in fact, there was no defined BBF), Parana State had 35 goods with a zero statutory VAT rate.

In Portuguese, Fundo de Erradicação e Combate a Pobreza (FECEP). Since December 2006, no additional states have decided to create an FAP. The only exception is Brasilia (district capital), which created its FAP in 2008. However, we exclude Brasilia from our analysis and note again that our data are taken from 1992 to 2007. Information over FAP resources is not available for most states and years in our sample.

We present an alternative approach to tackle eventual colinearity between those variables and time effects in Sect. 5.

With respect to tax salience in a political competition framework, Krishna and Slemrod (2003) claim that policymakers wish to diminish the tax burden perception of the taxpayers to increase their chances of (re)election. Based on the market ‘price presentation’ strategy, this group notes that a sales tax designer could adopt selected tax cuts to minimise the ‘perceived’ tax burden on the most important taxpayer groups.

To illustrate this argument, we note that on average, the 26 state capitals are located 1,369 miles from each other. The closest two state capitals are Aracaju and Maceio and are located 183 miles apart. More importantly, more than 50 % of the states’ populations live in the state capitals.

We thank an anonymous referee for this suggestion.

For example, the Sâo Paulo Consumer Protection Foundation (Fundação de Proteção e Defesa do Consumidor—Procon, in Portuguese) releases monthly food prices on BBF goods on its Website http://www.procon.sp.gov.br/categoria.asp?id=111.

The 17 food goods are beans, beef, bread, cassava, chicken, coffee, crackers, eggs, milk, pasta, pork, powdered milk, rice, soybean oil, salt, sardines, and sugar.

Data are missing for the percentage of poor, income, unemployment, the average number of daily worked hours, the number of employed people, the number of households, and the Theil index. In addition, data on the percentage of the aged and young in the population are not available for this time period.

As discussed in Arellano and Bond (1991), a two-step GMM procedure may produce inefficient standard errors for finite samples. In addition, Roodman (2006) argues that authors report one-step results more frequently due to the well-known downward bias associated with two-step estimation. To avoid the problem of too many instruments, we follow Roodman (2009), and instead of allowing each instrument variable to generate one column for each time period, the lag ranges are restricted because they are ‘collapsed’ into a single column in the instrument matrix. We opt to not use the Tobit fixed effects even though we have a limited dependent variable (TTC and ATC case) because this procedure suffers from the incidental parameter problem.

Conversely, this dummy variable should also control for VAT rate movements on cigarettes and gas.

This approach follows that of Devereux et al. (2007).

The origin regime pattern can lead to higher tax rates because larger states should have a larger local tax base. This observation is in accordance with the work of Kanbur and Keen (1993).

As an extension, we explore the case that richer states have less interaction with neighbours’ states on pro-poor policies, which reinforces our main finding. The results are available upon request.

See Table A.3. in the Appendix.

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Titel: Pro-poor tax policy and yardstick competition: a spatial investigation for VAT relief on food in Brazil
verfasst von: Enlinson Mattos
Ricardo Politi
Publikationsdatum: 01.01.2014
Verlag: Springer Berlin Heidelberg
Erschienen in: The Annals of Regional Science / Ausgabe 1/2014
Print ISSN: 0570-1864
Elektronische ISSN: 1432-0592
DOI: https://doi.org/10.1007/s00168-013-0585-x

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