Evaluating Tax Reform in Vietnam Using General Equilibrium Methods

Abstract

In this paper we use a general equilibrium model of Vietnam, calibrated to 1995 data, to analyze tax reform options for Vietnam. We focus on aggregate welfare impacts as well as welfare of household groups ranked by income. The main focus is on indirect tax reform (VAT), but we also examine reforms in the external sector given both the revenue importance of the tariff and the role of tariffs in protecting domestic industry. Our numerical general equilibrium model is used to perform a series of counterfactual experiments around the 1995 base data, and we use a small country assumption with Armington differentiation between imports and domestic products. Results indicate that there are gains to Vietnam from indirect tax reform, but the redistributive effects associated with these reforms are large and tend to swamp the aggregate effects. There is a sharp redistribution against those with lower income and who spend a significant fraction of their income on previously non-taxed products, and redistribution in favour of those spending larger fractions of their income on earlier high taxed products; especially the richer households. This theme of regressivity of indirect tax reform comes through even more strongly in the case of international trade based reforms involving the tariff than is the case for domestic sales tax reform.