Distributional impacts of VAT

by Gemma Wright, Michael Noble, David McLennan & Boikhutso Moahlodi

This research study will examine the distributional and poverty impacts of changes in the indirect taxes (in particular, the VAT rate) and the transfer system using the SAMOD microsimulation model. The study will be jointly written with Jukka Pirttilä (UNU-WIDER) and government officials. The study will examine to what extent the recent VAT hike is compensated to people below the poverty line by increases in grant amounts and, if compensation is incomplete, how the transfer system ought to be reformed to better compensate for the indirect tax increases. It will also discuss the relative merits between increasing transfers versus increases the number of zero rated items in the VAT system (without necessarily carrying out full simulations about the latter topic).