Equity and Efficiency Tradeoff in Bangladesh Tax Policy Reform: A Computable General Equilibrium Model

Abstract

This study has employed a computable general equilibrium (CGE) tax model for Bangladesh to directly assess the efficiency and equity effects of a set of proposed tax reforms, particularly excise tax, import tariff, direct tax and value added-tax.

It has been found that pure excise tax reforms in the short run for resource mobilization have undesirable consequences on both efficiency and equity grounds. Tariff liberalization may enhance welfare even in a short run. But it is only through simultaneous reforms in all taxes that both equity and efficiency can be improved. A limited VAT stands out as a better alternative to excise taxes on efficiency group but may not be a desirable policy option on equity ground in a short ground. The overall results would point out that any single indirect tax reform could not be relied upon for favorable income redistribution in the short run.