Assessment of potential VAT differentiation scenarios for Ecuador

Abstract

The Value Added Tax (VAT) provides the highest tax collection in Ecuador. Because of its regressive nature, its increase would cause important changes of households’ income distribution. This research identifies items of consumption expenditure for which a marginal increase in the VAT rate would increase tax collection without affecting the progressivity principle. Marginal reform tools are used: (i) calculation of Gini Elasticities of Net Income to identify the candidate expense items; and (ii) estimation of Kakwani and Reynolds-Smolensky pseudo-elasticities to quantify the effects of marginal changes in terms of vertical equity.