One of the fundamental characteristics of value added tax (VAT) is its regressivity, which is a consequence of the fact that it is an indirect tax that does not discriminate against an individual’s ability to pay. Consequently, if we take individual income as an indicator of well-being in the analysis of the distributional impact of VAT, we confirm its regressivity since the lowest deciles allocate a higher percentage of their income for consumption than the highest deciles.

The emergency law on the VAT increase does not receive support in the Parliament, and the majority benches insist on other options

It is interesting to note that if we took consumption as an indicator of well-being, VAT is progressive, that is, the frequency of taxes increases with the level of consumption. The questioning of VAT due to its regressiveness has earned different types of responses. For example, one of them is that the distributive effect must be measured on all fiscal policies, not just on taxes, and even less on just one of them, however significant it may be. According to this reasoning, the relatively regressive effect of taxes can be neutralized and even reversed by directing spending on goods, services and transfers to the lowest-income segments of the population.

(…) VAT could definitely be raised with different values ​​in different quartiles.

In order to optimize targeting, goods and services with a significant impact on the consumer basket of the lower-income sector, which are often considered to be of social interest, must be identified. Classic examples are food products and health, education and transportation services. Subsequently, they could be eliminated from the base of the tax that should be increased (from 12% to 15%) and multiple rates could be introduced to be applied to the set of goods and services mentioned in the first paragraph. This type of intervention is universal in nature as it benefits all consumers, regardless of their income. A more specialized analysis can focus on the percentage of variation within a decile.

Fasten your seat belts

Some countries implement VAT based on the fact that individuals consuming the same good or service will face a different tax burden depending on whether the legislation identifies them as beneficiaries of tax credits. The aforementioned imposes an initial requirement in the formulation of the tax policy of identification of the user consumer population for each of the goods and services that are desired or exempted. In the case of Ecuador, where a liquidity base is needed to resolve an armed conflict, an increase could be induced in a fixed time horizon, until the previously described analyzes are carried out, on the basis of which the VAT could be increased. definitely with different values ​​in different quartiles.

Dying economy

The following factors should also be studied: a) the decrease in violent deaths compared to the increase in extortion; b) temporary payment of extortion in companies and institutions, since they are monthly and have a direct impact on the economy. (OR)