Simulation of the Impacts of Value-Added-Tax Increases on Welfare and Poverty in Vietnam

This study predicts the impact of increasing VAT on household welfare as measured by the average expenditure and poverty rate in Viet Nam. We forecast the impact of two scenarios of increasing VAT. Scenario 1 is to increase VAT by 1.2 times, i.e. increasing 5% VAT and 10% VAT to 6% and 12% VAT, respectively. Scenario 2 applies a common rate of 10% on all items, i.e., commodities subject to 5% tax can be taxed by a 10% rate. The results show that Scenario 1 has a stronger impact on households compared to Scenario 2. In particular, Scenario 1 reduces households' expenditure by 0.89%, while Scenario 2 decreases households’ expenditure by 0.32%. Under Scenario 1, the poverty rate is increased by 0.26 percentage points, while under Scenario 2, the poverty rate is increased by 0.22 percentage points. The number of poor people increases approximately by 240 and 202 thousand people in Scenarios 1 and 2, respectively. Regarding the impact on poverty, VAT only affects the near poor households. Better-off households are also affected, but this effect does not cause them fall into poverty