VAT Incidence and Rate Structure

Chapter 7 starts by reviewing the ways in which African countries mitigate the VAT’s regressivity, real or perceived, by providing concessionary treatment for foodstuffs. This is followed by a survey of the results of various VAT incidence studies, especially regarding South Africa. The results indicate that the incidence of most VATs is less regressive than is often thought. The discussion proceeds by highlighting the advantages and disadvantages in choosing the best instrument to mitigate the VAT’s regressivity, if desired: taxing basic foodstuffs at a zero rate, taxing them at a lower rate, or exempting them. In considering VAT’s regressive burden distribution, it is important to bear in mind that the issue should be viewed in the context of the entire tax and expenditure system. It has been shown that efficient regressive taxes (such as the VAT) when combined with generous well-targeted transfers can result in a net fiscal system that is equalizing.