THEORETICAL FRAMEWORK FOR EVALUATION OF EFFECTS OF VAT REFORMS ON HOUSEHOLD WELFARE: CASE OF MONGOLIA
Gantumur Purevjav1*, Unurjargal Chimedgochoo2, Uuriintuya Enkhtaivan3
* Corresponding Author: Gantumur Purevjav
1Department of Economics, University of Financial and Economics, Mongolia,
2Professional School of International Accountancy & Finance, University of Financial and Economics, Mongolia,
3Institute of Foreign Languages, University of Financial and Economics, Mongolia
Digital Object Identifier:
https://doi.org/10.53468/mifyr.2022.02.02.17
Abstract – In this study, the impact of VAT reform on household welfare was updated using the QAIDS model based on the 2015-2019 household socio-economic sample survey. Also, we studied the issue of determining the optimal level of VAT by the Armey model. The own-price elasticity of 14 food products and services was calculated using the QAIDS model, and the impact of the VAT reform on welfare was estimated by imposing a 10% VAT. Statistics for 2019 indicate that demand for goods such as meat, seafood, milk, and dairy products, fruits, vegetables, sweets and jams, tea, coffee and beverages, alcoholic beverages, and cigarettes have decreased by over 50 units. The factors influencing the C-efficiency of VAT collections are considered based on the work of Tagkalakis (2014). Some of the C-efficient macro-economic variables impacts of VAT have been enhanced using ARDL model. There are some significant statistical effects on VAT collection of C-efficiency, such as tax reform, GDP growth, population growth, and the proportion of foreign trade in GDP as result of the estimation. As a result of the reduction in consumption consumer welfare deteriorates. The impact of the price change on consumer welfare depends on the price elasticity of demand. Theoretically, if the price of the good is inelastic, demand for the good is not affected, therefore, the price increase reduces the consumption of alternative goods by households due to the substitution effect.
Keywords: Value added tax(VAT), Own-price elasticity, Cross-price elasticity, Income
elasticity, Quadratic Almost Ideal Demand System(QAIDS), C-efficiency of VAT collection,
Armeycurve
Article History: Received 2 June 2022, Received in revised form 07 June 2022, Accepted 29 June 2022