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Can taxes on consumption redistribute in developing countries? This paper shows that taxing consumption is progressive once informal consumption is accounted for. Using household expenditure surveys in 32 countries, the researchers proxy for informal consumption using the type of store where purchases occur. The researchers establish that the budget share spent in informal stores steeply declines with income, so that richer households pay a substantially larger share of their income in taxes. The findings imply that the widespread policy of exempting food from taxation is hard to justify on equity grounds in low-income countries.

In the past ten years, tax research has expanded markedly in low- and middle-income countries (LMICs). Novel, high-quality, digital-administrative data has combined with governments¡¯ openness to evaluating fiscal policy in a context of rising debt and investment needs to open up new knowledge frontiers. In this Policy Research Talk, Pierre Bachas focuses on the equity of tax systems and shows that the distributional impact of taxes is markedly different in LMICs due to the informal sector and imperfect enforcement.