Assessing the Distributional Impact of Lowering the Value‐Added Tax Rate for Standard‐Rated Items in Tanzania and Options for Recouping Revenue Losses

ABSTRACT This paper explores the distributional impact of lowering the value‐added tax rate for standard‐rated items in Mainland Tanzania. Using a static tax‐benefit microsimulation model for Tanzania—TAZMOD—which is underpinned by data derived from the Household Budget Survey 2017/2018, reductions in value‐added taxes from 18% to 17%, and then to 16% are simulated. The revenue losses and impact on poverty are estimated. The rules for direct taxes are then modified in order to identify ways in which the revenue loss caused by the lowering of the standard rate of value‐added taxes can be recouped. The main findings reveal that it is possible to be both revenue‐neutral and poverty‐neutral when reducing the standard rate of value‐added taxes, with lost revenue recouped through reforms to the personal income tax schedule that affect only the highest earners.