Impact of Value Added Tax on Income Distribution in middle-income selected countries

The main purpose of this paper is evaluation of VAT effectiveness on income distribution in a group of selected countries with average revenue. A challenge of tax policy makers is applying the VAT systems regarding to repressive effects of it. While the VAT was applied on all goods and services with same rate, regardless of price elasticity and price elasticity of demand, it resulted in transfer of the tax burden to consumers. Therefore, in on side, it conflicted with tax equity principle and if it is not considered, it could make distrust between public and taxpayers (consumers) and government and encourage people to be tax evasion. The results of model study using fixed effects and Generalized Method of Movement in middle-income selected countries during 1995-2015 showed that VAT have significant and positive effect on Gini coefficient as income distribution index. Increasing the VAT rate resulted in increasing the Gini coefficient and inequity.