Indirect Tax Incidence in Madagascar: Updated Estimates Using the Input-Output Table Harivelo Rajemison INSTAT

Introduction Recently, there has been renewed interest in the analysis of tax incidence in In part, this is motivated by the obvious need for tax reform in Africa, where revenues are small as a share of GDP (outside the economies with large mineral royalties) and the tax system is often highly distortionary, relying excessively on trade taxes and narrow commodity excises. Yet with every reform comes the concern of how a policy change will affect the distribution of income, and in particular, how poorer households will fare. Madagascar is no exception. Historically, tax-to-GDP ratios have been quite low in Madagscar. Arguably, the main goal of several important changes in tax policy in the 1990s was neither improved efficiency nor better equity, but simply to increase the amount of resources available to the public sector. In this, the reforms succeeded, albeit modestly. From 1995 to 1999, total tax revenue rose from 8.9 percent of GDP to 12.2 percent. To date, no analysis has looked at the equity consequences of Madagascar's tax reforms. The first purpose of this study is to fill that gap. Our second purpose is to evaluate a new method for assessing the incidence of taxes that fall primarily on intermediate inputs rather than final goods and services. All of the newer literature on tax incidence relies on nationally representative household survey data. Surveys of this type are increasingly available in Africa, and they provide an attractive new source of data. Nevertheless, they have their limits for tax analysis, particularly for taxes on intermediate consumption. With the exception of one previous study (Rajemison and Younger, 2000), existing studies either restrict themselves to taxes on final demand (Alderman and del Ninno, 1999) or make strong assumptions about the incidence of taxes on inputs As with our previous work, our aim in this paper is to follow up on the existing tax incidence studies for Madagascar by relaxing their rather strict set of methodological assumptions. In particular, rather than making use of only households' pattern of demand in the analysis, we also employ an input-output (IO) table for Madagascar. This permits us to trace an indirect tax levied on intermediate products through the IO table to final consumers. This approach is particularly important for analysis of import duties and petroleum taxes. Two-thirds of imports to Madagascar are intermediate goods, as is about 80 percent of petroleum consumption. Clearly, taking some account …