Alain Babatoundé, Bart Capéau & Romain Houssa (Revised, October 2024, Link to Online Appendix)
Abstract
In West Africa, the Value Added Tax (VAT) policy consists of a standard tax rate, but several items are exempted. We provide an optimal tax framework to reflect on the welfare effects of such a tariff structure, in the context of current debates on domestic resource mobilisation in low-income countries. We show that a uniform tax rate is not optimal when taking into account that home-produced consumption goods cannot be taxed. An application with household data from Benin shows that generally optimal VAT rate structures are supported by a majority of the population. In comparison to the current VAT policy, optimal tax reforms yield higher average relative welfare gains for the lower deciles. Due to preferences heterogeneity, however, we find winners and losers in all welfare deciles.