Distributional Aspects of Ghana’s Value-Added Tax

Abstract

Much of the argument against value-added tax (VAT) is that it is regressive and therefore burdens the poor, relative to the rich. In this paper, we examine the distribution of Ghana’s VAT burden as well as benefits from VAT exemptions across different categories of households, paying attention to how these distributions vary over time and across different socioeconomic characteristics. We use data from the last four waves of the Ghana Living Standard Surveys (GLSS) to compute the VAT liability and benefits from exemptions for each household. We find that the VAT regime has evolved from being progressive to regressive, thus hurting the poor more than it does the rich. We further find a rise in the burden on females in poorer households, the least educated and the unemployed. Finally, we find the current exemption regime to benefit richer households more, relative to poorer households.

Keywords:

• value-added tax
• tax burden
• distributive justice
• fiscal incidence
• equity

Acknowledgements

We wish to express our deepest appreciation to the African Economic Research Consortium (AERC) for the financial support to carry out this research. We are also grateful to the resource persons and members of the AERC’s thematic Group B for the various comments and suggestions that helped the evolution of this study from its inception to completion. We specially thank Leandro Medina and Siddharth Kothari (IMF headquarters, USA) for the invaluable suggestions. We also acknowledge constructive comments from colleagues at the School of Economics, University of Cape Coast. Finally, we thank the anonymous reviewers for the useful comments that have helped shaped this paper.