The impact of value added tax on consumption inequality: Simulation analysis

The fact that people cannot consume the same amount or at the same rate causes consumption inequality. In addition to income and wealth inequality, consumption inequality affects the welfare level of households. Empirical evidence-based consumption inequality studies are important to monitor fair distribution of social welfare. This study has two main objectives: i) To calculate the consumption inequality in Turkey; ii) To investigate the effect of Value Added Tax (VAT) simulations on consumption inequality. The Annual Household Budget Questionnaire data is used in the empirical part of this study which is gathered by Turkish Statistical Institute. In this study, consumption inequality is calculated by using six inequality measurement methods for the 2003-2014 period. While consumption inequality was at its lowest level in 2008, it reached its highest level in 2011. Financial crises period also tend to worsen consumption inequality. It is observed that consumption inequality is affected by economic cycles of Turkey. The effect of VAT on consumption inequality is investigated with 51 scenarios under 6 simulation models by changing 3 different rates (1%, 8%, 18%) specified in the Turkish VAT Law No.3065. According to the VAT simulation results, increasing the 18% standard rate, while the other two rates are the same, reduces the consumption inequality, and decreasing this rate increases the consumption inequality. In addition, reducing the rate of 8% without changing the other two rates (reduced rate %1 and standard rate %18) decreases the consumption inequality, and increasing the rate of 8% rises the consumption inequality. When a single VAT rate application is changed, consumption inequality does not change. In addition, consumption inequality increases when the standard and reduced VAT rates are increased too much. Based on the empirical findings of this study, it could be suggested that consumption inequality can be affected by a tax policy