VAT rise: Question for the World Bank's Lead Economist Sebastian Eckhardt

"Based on our calculations, in Viet Nam, 20 per cent of the poorest pay only 9 per cent out of 100 per cent of VAT revenue while 20% of the richest pay nearly 40%. This means that if a poor household saves an average of VND10,000 (roughly US$0.44) thanks to low VAT rates, the rich one can save VND40,000 (equivalent to US$1.76). Therefore, low VAT rates really benefit the rich rather than the poor," said Sebastian Eckhardt, the World Bank's Lead Economist for Vietnam in response to the press on August 31, 2017.

From the different perspective, Huynh The Du, Economic Expert has expressed his point of views.

“Is it true that low VAT rates benefit the rich rather than the poor or in other words, VAT rise makes the rich bear the higher tax burden?

According to Viet Nam Household Living Standards Survey in 2014 of the General Statistics Office, the monthly average income of a household member of 20 per cent of the poorest and 20 per cent of the richest is VND660,000 (approximately US$29.08) and VND6.4 million (equivalent to US$282.57) respectively.

As a result, the total income of the poorest (20 per cent) accounted for only 4.2 per cent of the total national household incomes while that of the richest (20 per cent) account for 48.6 per cent.

When the poorest and the richest account for about 9 per cent and nearly 40 per cent respectively out of 100 per cent of VAT revenue, the tax rate per unit of income of the poorest is 2.6 times higher than that of the richest: [(9% / 4.2%)/(<40% / 48.6%)].

In other words, VAT in Vietnam is very regressive now. Regarding the proportion of income, the rich are paying VAT far less than the poor. Therefore, VAT rise will have more impacts on the poor than the rich, which is contrary to Sebastian Eckhardt’s view. 

The VAT contribution gap is only four times while the income gap is nearly ten times between the richest and the poorest. Furthermore, regressivity or progressivity of tax is proportionally calculated. That a person with higher income pays higher taxes (in terms of absolute value) is quite obvious.”