Effects of decreasing the income tax rate and increasing the value added tax rate on household consumption behavior
Date
2014-12
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Abstract
The Philippines has the third highest individual income tax rate in the Association of Southeast Asian Nations (ASEAN) region. There are proposals being passed in Congress to reduce or lower the current income tax rates. This paper will consider an existing proposal on increasing the Value Added Tax (VAT) rate as well as decreasing the Income Tax rate. The purpose of the paper is to measure how the consumers will behave when these proposals are implemented. Using the Family Income and Expenditure Survey (FIES) data for 2009, the paper ran regressions (Iterated Seemingly Unrelated Regression or SUR) to capture the parameter estimates needed to compute for both the income and price elasticity of demand for different commodity groups. The total expenditure basket of the households is divided into goods that are subjected to VAT and goods that are exempted from VAT. The own-price and cross-price elasticity of demand are computed for both goods subjected to and goods exempted from VAT. In measuring the effect of a VAT increase from 12 percent to 15 percent, a 2.7 percent
increase in the price of goods is imposed. The goods that are exempted from VAT are more price elastic as compared to the goods that are subjected to VAT. Also, the simultaneous effect of both price and income changes of the households is presented. On the other hand, the income elasticity of demand captures whether the goods are luxury, necessity and inferior. The paper captures the effect on household consumption of the VAT rate increases and the income tax rate decreases.
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Keywords
Income tax, Value added tax, Household consumption