Evaluation of redistributive and welfare impacts of indirect taxes reform in Rwanda

This study evaluates the redistributive and welfare effects of reforms in indirect taxes in Rwanda. Specifically, its aim is to determine the effects of the 2002 reforms of the value added tax (VAT) rate on aggregate household welfare; assessing the impact of this reform on welfare distribution among Rwandan households; and evaluating the redistributive potential of differentiated indirect taxes in the country. A methodology based on two complementary approaches was used: a framework of the distributional characteristic of goods (Newberry 1995) and the framework of the marginal tax reforms (Ahmad and Stern 1984). Data used are from the second Integrated Survey on the Living Standards of Rwandan Households (EICV2) conducted by the government's statistics office in 2005-06. The results show that: (1) the 2002 increase in the VAT rate slightly decreased aggregate household welfare; (2) the reforms further affected the welfare of households in the first three quintiles because they consumed relatively more of taxable necessities; and (3) differentiated indirect taxes could improve Rwandan household welfare without compromising on tax revenues.