VAT in the Gulf Cooperation Council
Edited by Ehtisham Ahmad and Abdulrazak Al Faris
Chapter 9: A VAT in the UAE: Distributional Consequences and Social Sectors
Ehtisham Ahmad and Giorgio Brosio Any introduction of a new tax should be accompanied by an assessment of its impact on the poor, and the design should be assessed to enhance progressivity. The popular perception is that the VAT might adversely affect poorer groups in the UAE and worsen the distribution of incomes and expenditures. In this paper, we use recent household income and expenditure data for the UAE to simulate a likely distributional impact of the VAT. We also examine whether alternative treatment of the social sector under the VAT might improve the distributional impact. The impact of a VAT on households arises through changes in prices and consumption patterns, and we examine the resulting effects on households in different circumstances, ranked by per capita expenditures. We examine different household sizes, as these may reflect differing needs and spending patterns. The data permit a separate assessment of the impact for nationals and non-nationals, as these may lead to different policy responses (e.g., there may be a stronger case for compensating poorer nationals for the price of tax changes). The distributional or welfare impact of the introduction of the VAT is measured in this paper by the use of the compensating variation (for an analytical summary of the measure, see the Appendix 9A.2).1 This is the typical instrument used by economists to measure how and to what extent individual welfare might be affected by policy changes, and reflects the amount of “compensating” income needed to keep utilities (measured by...
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