Taxing fairly or failing badly? Reduced VAT rates and redistribution

Abstract

The application of reduced VAT rates in the EU generally aims to alleviate the regressivity of consumption taxation. However, while these measures generate redistribution across income groups, they also do so within income groups, leading to arbitrary redistribution among households with similar incomes but different consumption patterns. Using the Analysis of Gini (ANOGI) decomposition, we evaluate the redistributive impact of reduced VAT rates across EU Member States. Our results indicate that, while reduced VAT rates lower the regressivity of VAT taxation, their total redistributive effect is modest. This is because the between-group pro-redistributive effect is largely reduced by the within-group anti-redistributive one. This analysis underscores the limited capacity of reduced VAT rates as a tool for redistribution.