Modelling the Distributive Impact of Indirect Taxes

Modelling the Distributive Impact of Indirect Taxes



Micheál Collins


Changes to indirect taxes are a regular feature of annual Budgets. Despite this, the distributive impact of these changes are rarely considered – something that is in contrast to accompanying Budget changes to direct taxes or transfers.

This paper estimates the distributive impact of possible Budget changes to five key areas of indirect taxation: VAT, fuel excises, insurance levies, tobacco excises and alcohol excises. In doing so the paper examines how these changes impact across the income distribution alongside estimating the average household cost/gain and the full year exchequer revenue effect.

The changes examined are as follows:

(i)              VAT:1% increase in the standard rate; 1% increase in the first reduced rate; and a 1% increase in the second reduced rate.

(ii)            Fuel: 5c increase in a litre of petrol; and a 5c increase in a litre of diesel.

(iii)           Insurance levies: 1% increase in non-life insurance levies.

(iv)           Tobacco: 10c increase in a pack of 20 cigarettes.

(v)             Alcohol: 25c increase in a bottle of wine; 10c increase in a pint of Beer/Cider; and a 10c increase in a standard measure of spirits.

While the paper models increases to each of these indirect taxes, a similar (inverse) distributive impact emerges when reductions to these taxes are examined. The paper also includes tests on the reliability of the estimates using comparisons with the overall VAT yield and Department of Finance estimates on the full-year revenue effects of these changes.

Slides from the NERI seminar where this research was presented are available here.

Digital Revolutionaries