the income distribution and conclude that the VAT is highly regressive. However, this ignores the impact of savings behavior and the consequent need to consider the VAT in a lifetime or at least multi-period context. If instead VAT burdens are measured relative to their actual base – consumption – then they are typically found to be roughly proportional or even slightly progressive (see Annex for further detail). Additionally, recent evidence suggests that informality is likely to result in the VAT being slightly progressive in some developing countries (Bachas et al., 2020).

Table 2 presents expenditure-based effective VAT progressivity results for 26 OECD countries from Thomas (2020). As in Table 1, Kakwani, Reynolds-Smolensky and average tax rate results are presented. Note, though, that average tax rates are presented as _tax exclusive_ , rather than _tax inclusive_ , rates – thereby enabling clearer comparison with statutory standard VAT rates which are typically specified on a _tax exclusive_ basis.

Kakwani index results in Table 2 are all very low, with even the highest result (Italy at 0.0822) significantly lower than the smallest direct tax result in Table 1 (United States at 0.136). In 22 of 26 countries the results are positive, showing the VAT to have a very small progressive effect. This slight progressivity is driven by the presence of reduced or zero VAT rates on products that typically make up a greater proportion of the expenditure of poorer households than richer households, particularly food products purchased for home consumption.

In four countries (Chile, Hungary, Latvia and New Zealand) the Kakwani index results are slightly negative, showing the VAT to have a very small regressive effect. These slightly regressive results provide two interesting insights: first, low spending households in these countries do not benefit significantly from reduced VAT rates. On close consideration, this is not surprising: Chile and New Zealand both have very few, if any, reduced rates in comparison to the majority of countries covered in the study. Hungary and Latvia also have relatively few reduced rates, and importantly the vast majority of food products are subject to the standard rate.<sup>24</sup> Second, higher spending households in these – and presumably other – countries spend a greater proportion of their total expenditure on items that are either untaxed or exempt from tax (for example, financial services, international air travel).

Turning to the Reynolds-Smolensky results, it follows logically that the 22 countries with a positive Kakwani index, also have a positive Reynolds-Smolensky redistribution index – showing that inequality has fallen in these countries. Conversely, the four countries with a negative Kakwani index, also have a negative Reynolds-Smolensky index – indicating an increase in inequality. However, in all cases the redistributive effect is very low, ranging from 0.0082 in Belgium to -0.0025 in New Zealand. Redistribution is low despite average tax rates typically being above 11%, further emphasizing the very low degree of progressivity (or regressivity) in the VAT. This highlights that even in countries with the most extensive use of reduced VAT rates and exemptions, the VAT can be expected to have very little impact on redistribution.

> 24 Note that while Latvia applied the standard VAT rate to all food products except baby food in 2010 (the year modelled), it now also applies a reduced VAT rate to some fresh fruit and vegetables. Hungary now also applies a reduced VAT rate to a wider range of basic food products than in 2010.

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