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IS THE ITABIS REGRESSIVE IN THE DOMINICAN REPUBLIC

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					         IS THE ITBIS REGRESSIVE IN THE
              DOMINICAN REPUBLIC?




                                         By

                                  Glenn P. Jenkins

                                         and

                                   Chun-Yan Kuo


                                    July 30, 2004


Paper prepared for the Government of the Dominican Republic. The authors are
grateful for discussions and assistance from Alberto G. Calderon, Dilia M. Cruz,
Magin J. Diaz Domingo, Hector Guiliani Cury, Ramon Frias Peguero, and
Francisco Tejeda. The work of Andes H. Arroyo Pelaez in the quantitative
modeling of the tax incidence has been essential for the completion of this project.
Needless to say, all errors and omissions remaining are responsibility of the authors.




                                          1
          IS THE ITBIS REGRESSIVE IN THE DOMINICAN REPUBLIC?

I.    Introduction

It is the traditional view that the value added tax is a regressive tax. It was thought that
because the poorer households spend a greater proportion of their income on
consumption and consequently they must also bear a proportionally greater tax burden as
compared to higher income households. However, this issue has not been examined
closely from either the conceptual or practical points of view to determine what is the
proper base of the measurement as well as whether the tax is actually levied and paid.

At present, there are more than 130 industrial and developing countries in the world who
have currently adopted the value added tax (VAT) as the general consumption tax. The
issue of the tax regressivity is often a serious concern, especially in the course of tax
reform. In the Dominican Republic, there is a wide range of goods and services that are
specifically exempted from the tax on the transfer of industrialized goods and services
(ITBIS).1 In addition to the revenue cost, inequities are created between taxable and
exempt commodities, as administrative difficulties arise in defining borderline issues.

To improve the economic efficiency as well as to raise additional revenue for the
programs, the government needs to broaden the base of the ITBIS. But the question
remains how regressive would be such a broad-based tax. The purpose of this paper is to
empirically examine whether the current tax system is regressive and whether broadening
the tax base would make it even more regressive.

Section II presents the arguments for the regressivity of the VAT and the counter
arguments. Section III discusses the analytical approach of the study. Section IV
describes the tax system in the Dominican Republic and the reform package as well as
the empirical estimation of the tax incidence whether the ITBIS is regressive or not.
Concluding remarks are made in the last section.

II.   Regressivity versus Progressivity

Like most of the VAT jurisdictions, the ITBIS in the Dominican Republic is a multi-stage
sales tax based on the destination principle. The tax is applied to the sales of goods and
services at all stages of the production and distribution chain. By using a credit invoice
method, vendors at each stage are able to claim tax credits to recover the tax they paid on
their business inputs including intermediate inputs and capital assets. As a result, the tax
is in effect applied only to the value added by each vendor. The only tax that does not get
credited or refunded is the tax imposed on final consumption purchased by individuals
and governments. Hence, the tax is equivalent to the retail sales tax on final consumption.



1
 The tax on the transfer of industrialized goods and services is the name given to the value added tax in the
Dominican Republic. It is a consumption based tax, using the invoice credit method and collected on a
distribution basis.


                                                      2
Since the tax is imposed at the destination principle, imports are taxed in the same way as
domestically produced goods. Exports are zero-rated. Hence, exports are not subject to
tax while exporters are still able to claim their input tax credits. Therefore, the ITBIS and
VATs of this type essentially apply to goods and services consumed domestically.

The main arguments that the VAT is regressive are based on the proposition that the
VAT is a tax on consumption, and the poor tend to consume a larger proportion of their
incomes than do the higher income groups. While the average propensity to consume
might be higher for low income households, to infer from it that the VAT is regressive is
based on the following assumptions: first, the savings of the higher income groups today
will never be consumed by these people in the future; second, all goods subject to VAT
will be taxed equally in practice; and third, the poor spend the same proportion of their
incomes on taxable goods as do higher income families.

The counter arguments are presented below.2 First, for most of the savings undertaken
today they will be a counterpart of consumption in the future that will be financed by the
savings of the retired. Their consumption out of savings will be subject to the VAT in the
future and hence, it is not correct to say that current savings avoids paying the VAT. It
simply postpones the payment of the VAT, and to the degree that the savings earns a rate
of return it will increase the amount of the VAT paid in the future. If the rate of return
from savings is equal to the discount rate, the present value of the future VAT payments
on savings will be equivalent to the VAT that would have been paid if all of the current
income was now consumed. The same relationship holds even if there are bequests in
which future generations consume the savings of prior generations.3

Second, in developing countries and also in some developed ones, the VAT is levied on
no more than 50 to 60 percent of the total value of goods and services consumed. Some
goods and services are taxed at almost full rates while other items will avoid taxation
principally at the retail, and maybe also the wholesale level of trade. As a consequence,
the purchase prices of these items will have a lower proportion of VAT content than
goods and services which are subject to VAT on all stages of their production and trade
chains.

Third, the poor tend to consume a larger proportion of goods and services that are not
taxed, or lightly taxed. In such countries, the higher income households purchase goods
and services that are more likely to be taxed.

This becomes an empirical question that until today has not been fully explored. However,
in a recent paper Jenkins and Arroyo have shown that in a fairly broad based
consumption type VAT in Bolivia, the single rate tax is progressive as the average
effective rate of VAT paid on consumption by the lowest quintile of households is 5.46

2
  See, e.g., Glenn P. Jenkins and Andres H. Arroyo Pelaez, “Evaluation of the Tax Progressivity of a Single
Rate Broad Based Value Added Tax in a Low Income Country: The Case of Bolivia”, paper prepared for
Viceministerio de Politica Tributaria, Ministerio de Hacienda, Bolivia, (September 2003).
3
  Erik Caspersen and Gilbert Metcalf, “Is a Value Added Tax Regressive? Annual Versus Lifetime
Incidence Measures”, National Tax Journal, Vol. 47, No. 4, (December 1994), pp. 731-46.


                                                     3
percent and rises to 6.98 percent for the top quintile of households.4 The implication is
very important because the general belief of regressivity on VAT by politicians and the
public does not always hold. On contrary, a broad based VAT may even strengthen the
progressivity of the overall tax system of a low income country.

III. Analytical Framework

If the proportion of annual income spent on consumption is greater for low income
groups than high income groups, other things being equal, a single rate broad based VAT
for one year would appear to be regressive. However, individuals tend to make their
highest incomes at middle age, but earn less in the early stage of their careers as well as
in retirement. Using annual income to measure the regressivity of VAT may be
problematic since the tax incidence of a particular individual over his lifetime would be
quite different from an estimate made at a particular point in time.5 The proper approach
seems to measure the ratio of the discounted present value of the taxes paid over the life
of the individual to the discounted present value of his lifetime earnings. Although it may
be theoretically appealing, it is extremely difficult to measure.

Alternatively, one can use the current consumption as a proxy for lifetime income. This
approach would remove the transitory phenomenon such as transitory income or
temporary illness. In this study, annual household expenditure instead of annual
household income is used as the base for measuring tax regressivity. Household
expenditures are a better measure of the permanent or long run income of a household as
compared to the household income measured for a particular period of time. This
approach has been recommended by economists for evaluating the regressivity or
progressivity of taxes.6

IV. Empirical Results

4.1 The Current Tax System

The ITBIS in the Dominican Republic was introduced in 1983, one of the first VATs
implemented in the Caribbean region. In 1998, the legislation specified the types of
goods and services that were subject to tax.7 It included:

    -   the transfer of industrialized goods;

4
  See Glenn P. Jenkins and Andres H. Arroyo Pelaez, “Evaluation of the Tax Progressivity of a Single Rate
Broad Based Value Added Tax in a Low Income Country: The Case of Bolivia”, paper prepared for
Viceministerio de Politica TRibutaria, Ministerio de Hacienda, Bolivia, (September 2003), p. 7.
5
  See, e.g., George N. Carlson and Melanie K. Patrick, “Addressing the Regressivity of a Value-Added
Tax”, National Tax Journal, Vol. 42, No.3 , (September 1989); Gilbert Metcalf, “Lifecycle vs. Annual
Perspectives on the Incidence of a Value Added Tax”, Tax Policy and the Economy 8, (1994), pp. 45-64.
6
  Gilbert Metcalf, “Lifecycle vs. Annual Perspectives on the Incidence of a Value Added Tax”, Tax Policy
and the Economy 8, (1994), pp. 45-64.
7
  Horwath, Sotero Peralta & Asociados Members of Horwath International and Russin, Vecchi & Heredia
Bonetti L.L.P., Tax Code of the Dominican Republic, Title III on the Tax on the Transfer of Industrialized
Goods and Services, (October 1997).


                                                    4
   -   the importation of industrialized goods;
   -   the rendering of services of telephones, cables, telexes, televisions by cable or
       closed circuit, pagers, radio-telephones and the like;
   -   the rendering of services by bars, restaurants, nightclubs, discotheques, cafeterias
       an similar establishments;
   -   the rendering of services by hotels, motels, motels, hotel-apartments and similar
       establishments;
   -   the rendering of rental services of tangible personal property, including vehicles
       and equipment; and
   -   the rendering of services by flower shops, floral arrangers and the like.

The tax rate was 8 percent. At the same time, the law also specified a list of exempt
goods and services. The list of exemptions was long and included:

   -   live animals such as horse, goat, roosters, chickens, ducks, geese, turkeys;
   -   fresh or refrigerated fish;
   -   milk and dairy, butter, fresh cheese (not ripped) including cottage cheese
   -   eggs and honey;
   -   bread, flour, cereals;
   -   rice, potatoes, oil and other condiments in general and other industrialized
       good of first necessary;
   -   fresh, frozen, ad dried fruits, nuts and vegetables;
   -   fresh, frozen or dehydrated meat, fish, sea weed; fresh or frozen seafood;
   -   water in its natural state;
   -   coffee, chocolate;
   -   butter, sausage, sausage meats and noodles;
   -   salt, sugar, and honey;
   -   works of art by national artists;
   -   books, newspapers, and paper for newspaper;
   -   petroleum and its derivatives;
   -   medicine for human and animal use;
   -   fertilizer, manure, seeds and animal food;
   -   fungicides, herbicides, insecticide;
   -   match; and
   -   soap, detergents;
   -   toothpaste;
   -   services related to education, health, culture, transport, financial services
       other than insurance, personal care;
   -   electricity, water; and
   -   residential rent.

In addition to exempt goods produced locally, the following imported goods were
also exempt:

   -   salted cod and herring;
   -   corn and wheat;



                                             5
    -   edible unrefined oils;
    -   imports by public sector institutions;
    -   final imports of goods for personal use that are exempted from import duties,
        subject to special regulations for passenger baggage, disabled persons,
        immigrants, returning residents, and personnel from the foreign service of
        the country;
    -   final imports made with exemptions in matters of import duties for
        institutions of the public sector, international organizations of which the
        Dominican Republic forms a part;
    -   final imports of samples and parcels exempted from import duties;
    -   imports of machinery and spare parts for the same raw materials, supplies
        and equipment and their spare parts made by industrial free zone enterprises;
        and
    -   equipment, machines and materials imported by agricultural, industrial,
        mineral exploitation or public service enterprises that are totally or partially
        exempt from import duties by means of contracts approved by the National
        Congress.

When goods and services were not listed as taxable or exempted items, they were all
regarded tax exempt under the ITBIS.

In 2001, the tax rate was raised from 8 percent to 12 percent. At the same time, the law
also provided a detailed description in terms of specific goods and services that are
exempt according to tariff commodity codes. If the goods or services are not specified in
the tax code as the exempt commodities they are all taxable. Clearly, the legislation has
become much tighter than before. As a result, the tax base is broader especially in the
services related to goods provided.

There is a threshold for small businesses for filing the ITBIS tax. For those who carry out
commercial activities with gross sales less than RD$2 million a year, they are outside of
the system and are, therefore, not required to register or to collect ITBIS from their
customers.

4.2 The Data

The main data source for evaluating the regressivity of the ITBIS is the 1998 Household
Expenditure and Income Survey conducted by the Central Bank of the Dominican
Republic.8 It was a stratified sample nationwide. The sample was extracted from 10
districts, classified by National District Urban, National District Rural, Santiago Urban,
Santiago Rural, Cibao Urban, Ciabo Rural, Southwest Urban, Southwest Rural, Southeast
Urban, and Southeast Rural. The total sample size was 4,774 households, extracted from
the total population of 1,919,064 households. Each sample had its own sample weight so
that the national expenditures or income by different type of classification can be
properly calculated.

8
 Dominican Republic, Department of National Accounts and Economic Statistics, National Household
Survey of Expenditures and Incomes, October 1997 to September 1998, (July 1999).


                                                 6
In the survey, households were asked for their annual expenditures on goods and services
by commodity as well as by establishment beginning in October 1997 for the period of
one year. The commodity breakdown was very detailed consisting of as many as 2,042
items.9 Based on the nature of goods and services consumed, the amount spent on some
items were captured daily in the survey questionnaire while others were recorded on a
monthly, quarterly, or even annual basis. The establishment where households purchased
their goods or services was also detailed. It identified 337 places where items could be
purchased. These establishments include public institution, supermarket, companies such
as telephone companies, insurance companies, insurance, airlines, and banking, stores
that issue invoices, stores that do not issue invoices, neighborhood stores, street, street
markets, and so on. With this information, one can determine fairly accurately if the
ITBIS levied on goods or services purchased were actually paid if purchased in a
particular type of establishment.

The households were first ranked by quintile for the nation as a whole according to their
annual consumption on goods and services. Each quintile contains approximately
383,813 households. The reason for the slight deviation from this figure is due to the
number of households which carried a weight that could belong to either side of the
quintiles. Table 1 shows that the average annual household expenditures increase from
RD$16,074 for the first quintile to RD$190,237 for the top quintile. Within each quintile,
the top quintile of households shows the greatest dispersion in terms of their annual
household expenditures.

For the purpose of this presentation, the households are grouped into three areas, the
National District, Rest Rural, and Rest Urban. The distribution of these households is
shown in Table 2. It shows a greater proportion of households in the National District
which has the highest level of annual expenditures as compared to the households
concentrated in the of Rest Rural area (see Table 2C).

It is important to know that even if a commodity is subject to the ITBIS, the tax may not
be levied and actually collected. This is legal, for example, when the gross sale from a
business is less than the small business threshold. It would accommodate most street sales,
sales in the street markets, etc. A lot of taxes, however, may not be collected from other
establishments such as neighborhood stores or other stores which simply do not issue
invoices. This is quite common especially in the rural areas of the Dominican Republic.
Numerous examples can be found in practice. In the rural area where the informal
economy is dominant, most taxes would not be collected. These goods include not only
those produced by vendors themselves but also purchased from wholesalers or other
manufacturers. In the latter case, when the good was sold or produced the tax is likely
levied and collected by the wholesaler or manufacturer. However, some of the
distribution channels could well be too small or incapable to collect the tax for
administrative or other reasons. In the case of the Dominican Republic, transport services

9
  It may be noted that direct taxes such annual income tax were not included in this report. As a result, the
total household expenditures used in this report are approximately two percent less than the figure
published by the Central Government.


                                                      7
are also exempt under the ITBIS and thus both the retail and transportation margins
together might escape the tax.

After consultations with government officials and people from some private sectors, the
337 types of establishments were grouped into the following nine categories: companies,
stores that generally issue invoices, supermarkets, public institutions, neighborhood
stores, streets, street open markets, others, and not specified. The first four categories
generally issue invoices while the remainder does not issue invoices. For goods sold in
the latter category, we estimate the percentage of trade and transportation margins in the
retail price of goods by commodity based on the input-output tables constructed by the
Department of National Accounts of the Central Bank of the Dominican Republic. With
this information and the traditional assumption that consumption taxes are fully passed
forward and borne by consumers, a tax rate matrix was constructed to reflect the
approximate content of the ITBIS that a good or service would be subject to if it were
purchased from the establishment. For example, a toy is fully taxed when it is purchased
at supermarkets, then the coefficient is equal to 1.00. However, if a toy is taxed at the
manufacturer level but not taxed at the neighborhood store, the coefficient for buying the
good at the neighborhood store would be 0.65.

As was previously mentioned, the number of goods and services were identified in the
survey as many as 2,042 items. For the purpose of this presentation, they are grouped into
following 10 commodity categories:

       -   Food;
       -   Clothing;
       -   Housing and utilities;
       -   Furniture, textiles, household equipment, and maintenance;
       -   Health;
       -   Transportation;
       -   Entertainment;
       -   Education;
       -   Hotels, bars, and restaurants; and
       -   Diverse goods and services.

However, the amount of taxes paid was estimated based on a classification of goods and
services that contained different categories.

4.3 The Simulation Results of Various Tax Scenarios

Three tax scenarios are analyzed and presented in this paper. The first scenario is the base
case which is based on the latest household expenditure survey in 1998 and the 1998 tax
system. The second scenario analyzes the incidence of the present tax system while using
the 1998 household expenditure patterns. The third scenario assesses the tax incidence if
the tax base of the ITBIS were broadened. Again, the base for the measurement of tax
incidence is annual household expenditure.




                                             8
4.3.1 The 1998 Tax System

The table of tax coefficients for 1998 is presented in Table 3. The tax coefficients were
then multiplied by the statutory ITBIS rate for the good or service to reflect the effective
tax rate of the corresponding item. In the Dominican Republic, the tax rate was 8 percent
in 1998.

It should be noted that in this exercise, each of the 2042 commodity items is identified as
taxable or not. It is then applied to the tax coefficient matrix, the tax rate, and the average
household expenditures by quintile to generate the amount of the ITBIS paid by the
households on their purchases. The results are aggregated and presented for each of the
major expenditure items by quintile of the households. Table 4 shows the distribution of
the average annual household expenditures on goods and services by quintile and by area.
The corresponding taxes paid for each of the major expenditure categories by quintile and
by area are presented in Table 5. Finally, the effective tax burden borne expressed as a
percentage of the average household expenditures is shown in Table 6 by quintile, by
area, and for the nation as a whole.

Overall the average effective rate of the ITBIS as estimated from the household survey
was 2.52 percent in 1998. This is almost equal to the average effective rate of the tax,
2.57 percent, obtained from the macro data obtained from the national accounts.10 The
latter was calculated by dividing the total taxes paid by resident Dominicans by their
household expenditures. The amount of the total taxes paid was calculated by subtracting
the taxes paid by governments, foreign tourists, and non-resident Dominican visitors
from the total ITBIS collections in the country. In other words, the result is equivalent to
the effective tax rate calculated from the national household survey.

With the 2.52 percent effective tax rate, it implies that in 1998, only 31.5 percent of the
household expenditures were actually taxed. It is interesting to observe that household
expenditures on hotels, bars and restaurants were almost fully taxed while those spent on
education, electricity, water, garbage disposal, and other related services were largely
exempted under the ITBIS. See Table 6.

For the nation as a whole, the average effective tax rate of the ITBIS on consumption was
1.48 percent for the lowest quintile of households and rose to 2.82 percent for the top
quintile in 1998. The progressivity rose from the first quintile to the second quintile
because the effective tax rate increased from 1.48 percent to 1.81 percent. A similar
observation was found between the second and the third quintile (1.81 percent versus
2.13 percent), between the third and the fourth quintile (2.13 percent versus 2.57 percent)
and between the fourth and the top quintile (2.57 percent versus 2.82 percent).

It is interesting to find that the top quintile of households paid more than 90 percent of
the ITBIS per unit of expenditures than did the bottom quintile of households. When

10
   See Appendix A. In this calculation, we did not take into account the taxes paid by local governments
because of the lack of the information. If it were incorporated, the effective tax rate would have been
slightly lowered.


                                                     9
comparing the increase of the tax burden between quintiles of households, it rose by 22.3
percent, 17.7 percent, 20.7 percent and 9.7 percent. The lesser increase in the effective
tax rate from the fourth to the top quintile of households may be expected because the
richer households tend to shop relatively in the formal markets and pay taxes as required
by law.

Among three areas, the households in the National District had the highest effective tax
rate at 2.65 percent. This rate can be compared to the urban area (2.59 percent) and the
rural area (2.13 percent). In terms of the degree of progressivity, the ITBIS was clearly
progressive within each of the areas examined, especially in the rural area where the top
quintile of households paid more than almost 104 percent of the ITBIS per unit of
expenditures than did the bottom quintile of households. This may be due to the fact that
in the rural area, the lowest quintile of households shopped in a greater proportion in the
informal markets while the top quintile of households paid taxes on their consumption. In
the case of the National District, the degree of progressivity was somewhat reduced
between the top and the bottom quintile of households. This is because the National
District contains both urban and rural areas.

4.3.2   The Current Tax System

As was mentioned in Section 4.1, the ITBIS was amended in 2001 and the system has
become tighter albeit a wide range of goods and services still remain exempted. In this
case, because of using the 1998 household expenditure data the implications are that the
patterns of the household expenditures in the Dominican Republic are not altered. We
further assume that the proportion of trade and transportation margins in retail price by
commodity is also not changed.

Employing these assumptions, the model is simulated to assess the effective tax rates of
the ITBIS by quintile and by area. The final results of the tax incidence are presented in
Tables 7A and 7B. The overall effective tax rate in this scenario is increased from 2.52
percent to 2.72 percent for the nation as a whole if the statutory tax rate were kept at 8
percent. It appears that in terms of the revenue collections, the overall improvement of
the tax system is marginal.

Looking closely at the issue of regressivity, Table 7A shows that the tax system after the
reduction in exemption is more progressive than the 1998 tax system (i.e., the increase in
the effective tax rate is 105 percent versus 90 percent). This is due to the fact that more
services are now taxed and they are consumed more by richer households.

If the tax rate of the current system is 12 percent instead of 8 percent, the effective tax
rates by quintile and by commodity would be proportionally increased by 50 percent (see
Tables 7A and 7B). The story about the progressivity would be the same as before. Of
course, this is under the assumption that no behavior response regarding household
expenditures on exempt and taxable items as a result of change in tax rates is changed.




                                            10
It may be noted that a study recently undertaken by the Ministry of Finance showed that
the ratio of taxable expenditure to the total household expenditures increased along with
the quintile of households based on average household income and thus conclude the
current ITBIS is progressive.11 Nevertheless, the study does not take into account where
households purchased their goods and services and if the ITBIS were actually levied and
paid.

4.3.3    The Reform Tax System

Under the current tax system, there is still a wide range of tax exemptions for many types
of goods and services. As a result, many taxpayers would have a high percentage of
mixed (taxable and exempt) sales. This adds administrative complications because the
taxpayer should only claim an input tax credit against taxable goods sold. The tendency
for the taxpayer is likely to try to utilize some of the excess input tax credits illegally. The
ultimate result is that fewer tax revenues are collected than would otherwise be the case.

For revenue, economic efficiency and administrative reasons, the Dominican Republic
should limit its list of the exempt goods and services. However, bringing gasoline and
other oil products into the ITBIS system may be difficult. The government can collect
even more revenue by exempting these items from the ITBIS and keeping them subject to
excise taxes. In this scenario, we assume that the ITBIS exempt list only includes:12

         -   live animals;
         -   basic groceries including meat, fish, milk, butter, cheese, rice, potatoes, corn,
             bread, cereals, flours, grains, wheat, corn, beans, fruits, nuts, vegetable, and
             cooking oil;13
         -   plants for sowing;14
         -   gas and diesel oil;
         -   a list of essential drugs prescribed by medical doctors;
         -   electricity;15
         -   deposit-taking and other financial services for technical reason that virtually
             no country in the world has taxed this sector;16 and

11
   Pavel Isa-Contreras and Edgar Morales, “Fiscal Potential and Equity: Elements for Discussion in the
Case of the ITBIS”, paper prepared for the Department of Economic Studies, Ministry of Finance,
Dominican Republic, (February 2004).
12
   There should not be any exemption allowed for imports made by government departments or other public
institutions. This would remove the bias in favor of imported items and also help to avoid any abuse of the
system. See Hector Guiliani Cury, Glenn P. Jenkins and Chun-Yan Kuo, “Fiscal Adjustment for
Sustainable Growth in the Dominican Republic”, paper prepared for the Government of the Dominican
Republic, (March 2004).
13
   As a result, salamis, coffee, tea, water, sugar, salt, cocoa, chocolate, ketchup, vinegar, fertilizer,
insecticides, books, soap, match, detergents, mineral products and computer equipment should all
become taxable.
14
   Including harmonization codes 06.01 and 06.02.
15
   This sector is being subsidized.
16
   Taxing insurance services, especially life insurance, is theoretically problematic under a value added tax.
In all simulations under the ITBIS, we keep it taxable but will calculate the incremental revenue
implications if an excise tax, rather than the ITBIS, on insurance premiums were imposed.


                                                     11
       -   some social services for not commercial purpose such as education, and health
           services because of the difficulty in measuring the price of output. The
           exceptions are services provided by private schools and private clinics for the
           purpose of profit making.

Moreover, one of the provisions under the current ITBIS legislation provides for an
exemption of imported goods under certain circumstances. In fact, whether a good is tax
exempt or not under the ITBIS should not be tied to its exemption from import duty. We
assume this scenario will eliminate this form of exemption provision.

Currently, air transportation tickets, telephone services, and insurance premiums are
included in the ITBIS. Previously they were subject to excise taxes. The insurance sector
is notoriously difficult to tax under either an income tax system or a value added tax.
Under a value added tax, it is likely that significant excess tax credits will be generated in
these activities that will be used to reduce taxes elsewhere. It is our assumption that this
scenario would exempt the insurance industry from the ITBIS and, instead, impose a 10
percent excise tax on all insurance premiums.

The real cost of provision of telephone services has fallen significantly in recent years. In
particular, the cellular telephone usage has become widespread. These innovations have
resulted in very significant benefits to consumers. Therefore, this scenario would impose
a low excise tax of 10 percent on telephone bills, in addition to the current 12 percent
ITBIS.

In the case of airline tickets, the main problem of taxing them under the ITBIS is the
control of the tax credits that are generated. It is almost impossible to separate business
trips from trips taken for pleasure. Hence, to reduce the leakage of revenue, this scenario
imposes a 10 percent excise tax on the sale of airline tickets, while exempting them from
the ITBIS.

Considering the above base broadening package at the statutory tax rate of 12 percent, the
model is simulated to assess the effective tax rates of the ITBIS by quintile and by area.
The final results of the tax incidence are presented in Table 8. The overall effective tax
rate for the country as a whole would be 5.97 percent, which is almost two percentage
points or about 46 percent higher than that under the current tax system (4.08 percent).
This also implies that about 50 percent of the private consumption would have been taxed
under the reform package.

Regarding the issue of progressivity, the package taken as a whole is incrementally
progressive over all quintiles of expenditure and in all areas. The overall degree of
progressivity of the ITBIS is reduced somewhat. Nevertheless, with this reform package
the tax system is still very much progressive for the nation as a whole. The tax incidence
would rise slightly from the first to the second quintile of households, but it would
accelerate when moving from the next quintile to the highest quintiles of households.




                                             12
A similar observation can be found for each of the three areas. Nevertheless, it appears
that the ITBIS would be more progressive in the urban area than that in the rural area or
the National District. In terms of the effective tax rate, they would increase by 44.7
percent, 40.6 percent, and 32.8 percent, respectively.

When comparing the empirical results in Bolivia by using the same analytical approach,
the story is similar in terms of the progressivity of the general consumption tax. As
expected, the effective tax rate in Bolivia is higher than that in the Dominican Republic
even with the tax reform scenario. This is because Bolivia has a very comprehensive tax
base and a higher tax rate than the Dominican Republic (i.e., a tax rate of 14.94 percent
versus 12 percent).

Chart 1 shows the relative progressivity of the tax system under the three scenarios
explained above. Although the tax rates are different among scenarios, the progressivity
of the ITBIS in the Dominican Republic appears undisputable.

4.4 Alternative Estimates for the Effective Tax Rates

In this section, annual household income rather than annual household expenditure is
used to measure tax regressivity while the quintiles of households are still based on
annual household expenditures. In other words, the effective tax rate is expressed as a
ratio of taxes paid to the average household incomes. One would expect that the effective
tax rates are lower than those presented in the previous section because part of incomes
used as the measurement is saved for future consumption.17

The simulation results are summarized in Table 9 for three tax scenarios as well as three
areas. Chart 2 also shows the relative progressivity of the tax system under three
scenarios for the country. The results show that the degree of progressivity is even
stronger for all cases than the corresponding figures while using annual household
expenditure as the measurement. For example, the overall effective tax rate under the
reform package for the nation as a whole would increase by more than 138 percent from
the lowest to the highest quintile as compared to 44 percent while using annual household
expenditure as the measurement.

V.       Concluding Remarks

In this paper, we have shown that the current ITBIS in the Dominican Republic is very
progressive. The analysis is detail and thorough, in the sense we examine carefully
whether the tax is indeed levied and collect by vendors in the economy. It is the general
assumption that when a tax is enacted, the tax would automatically be collected. This,
however, is not the case in reality, especially in the developing country such as the
Dominican Republic.

Using the current consumption as a proxy for the lifetime income, the effective tax rate
for the nation as a whole has increased from 2.32 percent for the first quintile of
17
     The results appear to suggest that the proportion of household income was as high as 30 percent in 1998.


                                                      13
households to 4.72 percent for the top quintile of households. The degree of progressivity
may differ among areas, but the nature of progressivity of the tax system is very clear. If
annual household income instead of household expenditure is used as the base for
measurement, the degree of progressivity would be even stronger.

When comparing the system with other developing countries, there is no reason to keep a
wide range of goods and services exempted. For the sake of revenue, economic efficiency,
and tax administration, the current tax system needs to be reformed. However, the issue
of regressivity of the tax system is one of the concerns by politicians and the general
public. The analysis is further carried out for a scenario in which the tax base is
broadened but the necessity such as basic groceries would remain exempted. The
simulation results also demonstrate the reform package still leave the ITBIS very
progressive even though the degree of progressivity is not as great as the current system.

The results of the analysis have also shown the weak tax administration in the Dominican
Republic. Although the Dominican Republic is the first country to adopt the value added
tax system in the Caribbean region, it does not seem to function as other countries in
terms of economic efficiency and revenue collection. It is time to make the system more
efficient and buoyant in revenue collection, especially at the time of negotiation for free
trade agreement with the United States.




                                            14
TABLE 1
THE RANGE OF HOUSEHOLD EXPENDITURES BY QUINTILE, 1998
(RD$)

                            Range                                                Number of
  Quintile                                                       Average
                    Minimun      Maximun                                        Households
             1             520        26,064                           16,074         384,292
             2          26,125        42,315                           34,213         383,448
             3          42,318        64,326                           52,470         384,116
             4          64,400       104,378                           81,531         383,447
             5         104,441     1,022,299                          190,237         383,761
    Total                                                                           1,919,064
Source: Dominican Republic, the Department of the Central Bank, National Survey of
         Household Expenditures and Incomes, 1998.



TABLE 2
DISTRIBUTION OF HOUSEHOLDS BY QUINTILE AND AREA

A. Number of Households (#)
                                                                 National
  Quintile        Rest Rural            Rest Urban                                 Total
                                                                 District
             1           203,504                113,500               67,288           384,292
             2           157,414                137,302               88,732           383,448
             3           121,961                141,514              120,641           384,116
             4            86,017                155,461              141,969           383,447
             5            52,785                132,446              198,530           383,761
    Total                621,681                680,223              617,160         1,919,064

B. Distribution by Area (percentage)
                                                                 National
  Quintile        Rest Rural            Rest Urban                                 Total
                                                                 District
             1              52.96                   29.53              17.51            100.00
             2              41.05                   35.81              23.14            100.00
             3              31.75                   36.84              31.41            100.00
             4              22.43                   40.54              37.02            100.00
             5              13.75                   34.51              51.73            100.00
    Total                   32.40                   35.45              32.16            100.00

C. Distribution by Quintile (percentage)
                                                                 National
  Quintile        Rest Rural            Rest Urban                                 Total
                                                                 District
             1             32.73                   16.69               10.90             20.02
             2             25.32                   20.18               14.38             19.98
             3             19.62                   20.80               19.55             20.02
             4             13.84                   22.85               23.00             19.98
             5              8.49                   19.47               32.17             20.00
    Total                 100.00                  100.00              100.00            100.00
Notes:
(1) National District includes the urban and rural area of the District.
(2) Rest Rural refers to the Rural Santiago, Rural CIBAO, Rural Southeast and Rural Southwest.
(3) Rest Urban refers to the Urban Santiago, Urban CIBAO, Urban Southeast and Urban Southwest.
Source: Dominican Republic, the Department of the Central Bank, National Survey of
         Household Expenditures and Incomes, 1998.



                                                        15
TABLE 3
TAX COEFFICIENT MATRIX BY COMMODITY GROUP AND ESTABLISHMENT

                                                                                                     1               2                 3                     4               5                     6           7          8         9
                                                                                                                                                          Public       Neighborhood                          Street     Not
                                                                                              Companies             Store      Supermarkets                                                    Street                             Others
                                                                                                                                                       Institutions        Store                             Market   Specified
                (1)
I.    FOOD                                                                                           -               1                 1                     -              0.7                  0.7          0.7       0.7         0
II. CLOTHING                                                                                         -               1                 1                     -             0.85                  0.85         0.85        -         0
III. HOUSING, UTILITIES                                                                              1               1                 1                     1              0.7                  0.7          0.7       0.7         0
IV. FURNITURE, TEXTILE ITEMS, HOUSE EQUIP., MAINTENANCE                                              1               1                 1                     1              0.7                  0.75         0.75      0.7         0
            (2)
V. HEALTH                                                                                            1               1                 1                     1              0.7                  0.7          0.7       0.7         0
                      (3)
VI. TRANSPORTATION                                                                                   1               1                 1                     1             0.85                  0.85         0.85      0.85        0
VII. ENTERTAINMENT                                                                                   1               1                 1                     1             0.65                  0.65         0.65      0.65        0
                (4)
VIII. EDUCATION                                                                                      1               1                 1                     1              0.8                  0.8          0.8       0.8         0
IX. HOTELS, BARS AND RESTAURANTS                                                                     1               1                 1                     -              0.8                  0.8          0.8         -         0
X. DIVERSE GOODS AND SERVICES                                                                        1               1                 1                     1              0.7                  0.7          0.7       0.7         0
Notes:
"-" stands for not applicable
(1) "Alcoholic Beverages" in the Food group have a tax coefficient of 1 in the establishments 2 to 8.
(2) Under the reform tax system, the "Medications and pharmaceutical products" have a tax coefficient of 0.5 in the establishments 1 to 4 and 0.35 in the establishments 5 to 8. The "Medical Services" have a tax
    coefficient of 0 if they are taken place in the establishment 4.
(3) "Motor vehicle purchase" in the Transportation group has a tax coefficient of 1 in the establishments 1 to 8.
(4) Under the reform tax system, the "Curricular teaching: School and Postgraduate" has a tax coefficient of 0 if it is taken place in the establishment 4.




                                                                                                                            16
TABLE 4
AVERAGE ANNUAL HOUSEHOLD EXPENDITURES IN 1998, BY COMMODITY, BY QUINTILE, AND BY AREA
(RD$)

                           AREA                                                       REST RURAL                                                                REST URBAN
                          QUINTILE                                1           2           3           4            5   Average              1           2           3            4            5   Average
I.    FOOD                                                 9,363.80   20,127.40   28,256.20   38,055.27    58,603.13    23,946.09    8,400.87   17,229.94   22,726.21    28,925.96    40,491.09    24,102.42
II. CLOTHING                                               1,036.19    2,523.92    4,698.52    9,285.16    15,580.94     4,507.66      964.67    2,204.06    3,793.19     7,483.30    15,679.47     6,158.20
III. HOUSING, UTILITIES                                      667.55    1,296.34    2,023.85    3,216.39     3,881.22     1,718.37    2,030.71    3,327.01    5,529.85     6,927.89    14,003.10     6,470.69
IV. FURNITURE, TEXTILE ITEMS, HOUSE EQUIP., MAINTENANCE      555.38    1,408.98    3,208.13    4,422.08    14,045.88     2,972.37      489.41    1,103.49    2,660.15     5,262.73    10,421.14     4,089.68
V. HEALTH                                                    370.70    1,043.23    1,492.16    3,338.97    11,066.96     2,079.88      569.76      765.96    1,623.60     2,859.04     8,022.98     2,803.02
VI. TRANSPORTATION                                         2,358.89    4,003.25    6,219.30   10,779.12    33,120.11     7,309.46    2,001.14    3,610.98    5,729.53    10,199.29    34,418.45    11,287.34
VII. ENTERTAINMENT                                           324.25      601.53      768.02    2,090.50     4,027.29     1,040.31      228.92      592.33      865.92     2,388.44     6,044.29     2,060.65
VIII. EDUCATION                                               94.51      461.81    1,237.33    1,540.24     3,677.91       916.00      165.52      939.31    1,768.03     3,641.09    12,403.28     3,832.23
IX. HOTELS, BARS AND RESTAURANTS                             381.30    1,327.86    2,720.18    4,715.89    11,030.14     2,583.72      875.47    2,375.04    3,702.24     6,596.44    14,179.00     5,664.06
X. DIVERSE GOODS AND SERVICES                                377.93      718.34    1,380.73    2,794.11     7,149.23     1,570.09      783.31    1,819.83    3,176.59     6,255.18    18,199.72     6,132.14
      TOTAL                                               15,530.50   33,512.66   52,004.42   80,237.73   162,182.82    48,643.95   16,509.77   33,967.97   51,575.31    80,539.38   173,862.51    72,600.43


                         AREA                                                     NATIONAL DISTRICT                                                         DOMINICAN REPUBLIC
                        QUINTILE                                  1           2           3           4            5   Average              1           2            3           4            5   Average
I.    FOOD                                                 7,695.70   17,141.41   23,627.77   28,624.34    37,690.14    26,631.16    8,787.32   18,398.93    24,765.20   30,862.22    41,533.33    24,865.01
II. CLOTHING                                                 774.99    1,702.92    3,369.62    6,206.33    14,314.78     7,020.52      969.33    2,219.41     3,947.61    7,414.71    14,959.93     5,900.82
III. HOUSING, UTILITIES                                    2,757.14    3,722.69    4,727.65    8,743.68    27,803.14    12,715.15    1,436.03    2,584.94     4,164.71    6,767.59    19,750.00     6,939.36
IV. FURNITURE, TEXTILE ITEMS, HOUSE EQUIP., MAINTENANCE      535.94    1,723.33    2,808.07    4,684.81    14,161.32     6,488.25      532.49    1,372.33     2,880.60    4,860.18    12,854.61     4,499.10
V. HEALTH                                                    471.52      814.31    1,572.29    2,863.56     9,812.74     4,291.15      447.14      890.98     1,565.75    2,968.37     9,367.56     3,047.33
VI. TRANSPORTATION                                         1,791.08    3,235.48    5,139.03    9,581.12    40,258.59    16,819.54    2,153.81    3,685.12     5,699.58   10,100.49    37,261.13    11,777.83
VII. ENTERTAINMENT                                           226.54      490.74    1,398.46    2,863.61     5,910.09     2,928.53      278.98      572.60     1,002.09    2,497.53     5,697.43     2,009.22
VIII. EDUCATION                                              594.85    1,099.37    2,099.03    4,277.52    18,135.74     7,451.18      203.09      780.33     1,703.48    3,405.45    14,168.69     4,051.35
IX. HOTELS, BARS AND RESTAURANTS                           1,096.96    3,654.64    5,332.80    7,324.24    12,952.24     7,538.84      652.56    2,241.26     3,902.54    6,444.05    13,111.25     5,269.10
X. DIVERSE GOODS AND SERVICES                                695.27    1,419.08    2,876.47    6,052.61    15,796.32     7,315.85      553.22    1,274.91     2,512.13    5,403.78    15,436.42     5,034.94
      TOTAL                                               16,639.99   35,003.97   52,951.18   81,221.82   196,835.08    99,200.17   16,013.99   34,020.79    52,143.68   80,724.38   184,140.34    73,394.05




                                                                                                 17
TABLE 5
AVERAGE ANNUAL TAXES PAID IN 1998, BY COMMODITY, BY QUINTILE, AND BY AREA
(RD$)

                         AREA                                                            REST RURAL                                                        REST URBAN
                        QUINTILE                                    1            2           3           4          5   Average           1        2           3           4          5   Average
I.    FOOD                                                      73.48       139.66      227.13      345.47     775.42       217.61    70.33   137.23      165.36      267.42     577.60       247.42
II. CLOTHING                                                    51.61       138.80      265.46      519.16     869.24       249.75    44.86   133.26      217.12      403.77     862.46       339.76
III. HOUSING, UTILITIES                                          4.24         6.71        9.09       20.28      12.12         8.70     2.10     5.83       15.43       17.61      21.06        12.86
IV. FURNITURE, TEXTILE ITEMS, HOUSE EQUIP., MAINTENANCE         18.41        60.67      157.79      213.25     874.97       156.14    15.82    41.84      133.24      315.96     582.70       224.47
V. HEALTH                                                        0.00         0.00        0.00        0.00       0.00         0.00     0.00     0.00        0.00        0.00       0.00         0.00
VI. TRANSPORTATION                                               4.69        17.99       52.26      138.90     514.11        79.21     4.96     9.91       41.62      114.86     832.49       199.83
VII. ENTERTAINMENT                                              13.90        31.91       37.30      113.87     247.94        56.75    11.60    33.74       50.50      150.86     315.41       115.14
VIII. EDUCATION                                                  1.93         6.44        8.83        7.94      15.95         6.45     1.58     3.46        9.63        7.87      23.67         9.37
IX. HOTELS, BARS AND RESTAURANTS                                30.39       106.18      217.53      377.12     880.89       206.48    69.95   189.58      295.44      527.26   1,132.87       452.49
X. DIVERSE GOODS AND SERVICES                                   11.00        21.69       36.45      116.58     273.90        55.63    37.88    82.94      132.90      287.16     817.78       275.57
      TOTAL                                                    209.64       530.05    1,011.86    1,852.55   4,464.53     1,036.73   259.07   637.80    1,061.25    2,092.79   5,166.04     1,876.92


                         AREA                                                        NATIONAL DISTRICT                                                 DOMINICAN REPUBLIC
                        QUINTILE                                    1            2           3           4          5   Average           1        2           3           4          5   Average
I.    FOOD                                                      68.58       136.32      206.47      289.75     454.07       280.16    71.69   138.02      197.88      293.20     540.91       248.29
II. CLOTHING                                                    47.11       107.89      203.63      409.89     863.22       432.42    48.83   129.66      228.23      431.92     863.78       340.40
III. HOUSING, UTILITIES                                          2.27         6.31        8.87        9.19      16.04        10.16     3.26     6.30       11.36       15.09      17.23        10.65
IV. FURNITURE, TEXTILE ITEMS, HOUSE EQUIP., MAINTENANCE         20.75        85.21      155.61      269.34     845.28       378.80    18.05    59.60      148.06      275.66     758.74       251.97
V. HEALTH                                                        0.00         0.00        0.00        0.00       0.00         0.00     0.00     0.00        0.00        0.00       0.00         0.00
VI. TRANSPORTATION                                               0.66         7.53       17.53       48.83     879.13       298.62     4.06    12.68       37.43       95.81     812.83       192.52
VII. ENTERTAINMENT                                              11.42        24.88       93.30      181.73     357.85       179.98    12.78    30.94       59.75      153.99     328.09       117.08
VIII. EDUCATION                                                  0.87         1.52        4.79        9.98      13.46         7.88     1.64     4.24        7.86        8.67      17.33         7.95
IX. HOTELS, BARS AND RESTAURANTS                                87.72       292.26      426.35      585.15   1,035.25       602.56    52.11   179.11      311.82      515.02   1,047.71       421.05
X. DIVERSE GOODS AND SERVICES                                   45.03        76.33      160.24      382.84     952.42       441.65    24.89    56.26      110.86      284.32     812.62       257.73
      TOTAL                                                    284.40       738.26    1,276.78    2,186.69   5,416.73     2,632.22   237.33   616.81    1,113.26    2,073.66   5,199.24     1,847.64




                                                                                                    18
TABLE 6
THE EFFECTIVE TAX RATES UNDER THE 1998 TAX SYSTEM, BY COMMODITY, BY QUINTILE, AND BY AREA
(Percentage)

                           AREA                                                      REST RURAL                                               REST URBAN
                          QUINTILE                                 1          2          3           4      5   Average         1      2          3            4      5   Average
I.    FOOD                                                      0.78       0.69       0.80        0.91   1.32         0.91   0.84   0.80       0.73         0.92   1.43         1.03
II. CLOTHING                                                    4.98       5.50       5.65        5.59   5.58         5.54   4.65   6.05       5.72         5.40   5.50         5.52
III. HOUSING, UTILITIES                                         0.64       0.52       0.45        0.63   0.31         0.51   0.10   0.18       0.28         0.25   0.15         0.20
IV. FURNITURE, TEXTILE ITEMS, HOUSE EQUIP., MAINTENANCE         3.31       4.31       4.92        4.82   6.23         5.25   3.23   3.79       5.01         6.00   5.59         5.49
V. HEALTH                                                       0.00       0.00       0.00        0.00   0.00         0.00   0.00   0.00       0.00         0.00   0.00         0.00
VI. TRANSPORTATION                                              0.20       0.45       0.84        1.29   1.55         1.08   0.25   0.27       0.73         1.13   2.42         1.77
VII. ENTERTAINMENT                                              4.29       5.31       4.86        5.45   6.16         5.46   5.07   5.70       5.83         6.32   5.22         5.59
VIII. EDUCATION                                                 2.05       1.40       0.71        0.52   0.43         0.70   0.95   0.37       0.54         0.22   0.19         0.24
IX. HOTELS, BARS AND RESTAURANTS                                7.97       8.00       8.00        8.00   7.99         7.99   7.99   7.98       7.98         7.99   7.99         7.99
X. DIVERSE GOODS AND SERVICES                                   2.91       3.02       2.64        4.17   3.83         3.54   4.84   4.56       4.18         4.59   4.49         4.49
      TOTAL                                                     1.35       1.58       1.95        2.31   2.75         2.13   1.57   1.88       2.06         2.60   2.97         2.59


                         AREA                                                     NATIONAL DISTRICT                                        DOMINICAN REPUBLIC
                        QUINTILE                                   1          2          3           4      5   Average         1      2           3           4      5   Average
I.    FOOD                                                      0.89       0.80       0.87        1.01   1.20         1.05   0.82   0.75        0.80        0.95   1.30         1.00
II. CLOTHING                                                    6.08       6.34       6.04        6.60   6.03         6.16   5.04   5.84        5.78        5.83   5.77         5.77
III. HOUSING, UTILITIES                                         0.08       0.17       0.19        0.11   0.06         0.08   0.23   0.24        0.27        0.22   0.09         0.15
IV. FURNITURE, TEXTILE ITEMS, HOUSE EQUIP., MAINTENANCE         3.87       4.94       5.54        5.75   5.97         5.84   3.39   4.34        5.14        5.67   5.90         5.60
V. HEALTH                                                       0.00       0.00       0.00        0.00   0.00         0.00   0.00   0.00        0.00        0.00   0.00         0.00
VI. TRANSPORTATION                                              0.04       0.23       0.34        0.51   2.18         1.78   0.19   0.34        0.66        0.95   2.18         1.63
VII. ENTERTAINMENT                                              5.04       5.07       6.67        6.35   6.05         6.15   4.58   5.40        5.96        6.17   5.76         5.83
VIII. EDUCATION                                                 0.15       0.14       0.23        0.23   0.07         0.11   0.81   0.54        0.46        0.25   0.12         0.20
IX. HOTELS, BARS AND RESTAURANTS                                8.00       8.00       7.99        7.99   7.99         7.99   7.99   7.99        7.99        7.99   7.99         7.99
X. DIVERSE GOODS AND SERVICES                                   6.48       5.38       5.57        6.33   6.03         6.04   4.50   4.41        4.41        5.26   5.26         5.12
      TOTAL                                                     1.71       2.11       2.41        2.69   2.75         2.65   1.48   1.81        2.13        2.57   2.82        2.517




                                                                                                  19
TABLE 7A
THE EFFECTIVE TAX RATES UNDER THE CURRENT TAX SYSTEM AT THE 8% RATE, BY COMMODITY, BY QUINTILE, AND BY AREA
(Percentage)

                           AREA                                                     REST RURAL                                                        REST URBAN
                          QUINTILE                                1          2          3           4             5   Average          1       2          3            4       5   Average
I.    FOOD                                                     0.83       0.73       0.85        0.98          1.43         0.97    0.86    0.82       0.76         0.96    1.48         1.06
II. CLOTHING                                                   5.14       5.60       5.76        5.62          5.65         5.62    4.88    6.19       5.83         5.54    5.62         5.65
III. HOUSING, UTILITIES                                        0.93       0.58       1.70        0.88          0.49         0.94    0.31    0.24       0.30         0.38    0.24         0.29
IV. FURNITURE, TEXTILE ITEMS, HOUSE EQUIP., MAINTENANCE        3.47       4.32       4.97        5.05          6.33         5.36    3.42    3.98       5.15         6.13    6.00         5.76
V. HEALTH                                                      0.13       0.00       0.00        0.00          0.00         0.01    0.00    0.00       0.00         0.11    0.08         0.07
VI. TRANSPORTATION                                             0.26       0.58       1.26        1.47          2.16         1.45    0.28    0.34       1.13         1.49    3.37         2.46
VII. ENTERTAINMENT                                             4.29       5.39       4.90        5.48          6.22         5.50    5.27    5.75       5.90         6.46    5.35         5.71
VIII. EDUCATION                                                2.05       1.40       0.71        0.52          0.43         0.70    0.95    0.37       0.55         0.22    0.24         0.28
IX. HOTELS, BARS AND RESTAURANTS                               7.97       8.00       8.00        8.00          7.99         7.99    7.99    7.98       7.98         7.99    7.99         7.99
X. DIVERSE GOODS AND SERVICES                                  2.95       3.06       2.73        4.29          4.07         3.69    4.90    4.64       4.25         4.77    4.85         4.76
      TOTAL                                                    1.42       1.63       2.08        2.40          2.95         2.25    1.64    1.92       2.14         2.71    3.27         2.77


                           AREA                                                  NATIONAL DISTRICT                                                 DOMINICAN REPUBLIC
                          QUINTILE                                1          2          3           4             5   Average          1       2           3           4       5   Average
I.    FOOD                                                     0.92       0.82       0.90        1.05          1.30         1.11    0.85    0.78        0.83        1.00    1.39         1.05
II. CLOTHING                                                   6.19       6.53       6.21        6.78          6.35         6.43    5.21    5.98        5.90        5.95    5.98         5.94
III. HOUSING, UTILITIES                                        0.08       0.23       0.27        0.14          0.15         0.16    0.39    0.30        0.51        0.32    0.18         0.26
IV. FURNITURE, TEXTILE ITEMS, HOUSE EQUIP., MAINTENANCE        3.94       5.22       5.71        6.02          6.32         6.15    3.54    4.49        5.26        5.87    6.23         5.86
V. HEALTH                                                      0.03       0.06       0.18        0.05          0.04         0.06    0.06    0.01        0.06        0.06    0.05         0.05
VI. TRANSPORTATION                                             0.12       0.32       0.52        0.69          3.26         2.64    0.25    0.45        1.00        1.20    3.16         2.34
VII. ENTERTAINMENT                                             5.17       5.28       6.82        6.55          6.35         6.40    4.65    5.50        6.06        6.31    5.97         6.00
VIII. EDUCATION                                                0.15       0.14       0.23        0.26          0.09         0.12    0.81    0.54        0.47        0.27    0.15         0.22
IX. HOTELS, BARS AND RESTAURANTS                               8.00       8.00       7.99        7.99          7.99         7.99    7.99    7.99        7.99        7.99    7.99         7.99
X. DIVERSE GOODS AND SERVICES                                  6.50       5.46       5.70        6.55          6.71         6.56    4.55    4.48        4.51        5.45    5.78         5.49
      TOTAL                                                    1.74       2.16       2.49        2.79          3.12         2.92    1.54    1.86        2.23        2.67    3.15        2.722

TABLE 7B
THE EFFECTIVE TAX RATES UNDER THE CURRENT TAX SYSTEM AT THE 12% RATE, BY COMMODITY, BY QUINTILE, AND BY AREA
(Percentage)

                           AREA                                                     REST RURAL                                                        REST URBAN
                          QUINTILE                                1          2          3          4              5   Average          1       2          3          4         5   Average
I.    FOOD                                                     1.25       1.10       1.27       1.47           2.14         1.46    1.29    1.23       1.13       1.43      2.22         1.59
II. CLOTHING                                                   7.71       8.40       8.64       8.43           8.47         8.43    7.32    9.29       8.74       8.32      8.43         8.47
III. HOUSING, UTILITIES                                        1.39       0.87       2.54       1.32           0.73         1.41    0.47    0.35       0.46       0.57      0.36         0.43
IV. FURNITURE, TEXTILE ITEMS, HOUSE EQUIP., MAINTENANCE        5.20       6.48       7.45       7.57           9.50         8.05    5.13    5.98       7.73       9.19      9.00         8.64
V. HEALTH                                                      0.20       0.00       0.00       0.00           0.00         0.01    0.00    0.00       0.00       0.17      0.12         0.11
VI. TRANSPORTATION                                             0.39       0.88       1.89       2.20           3.24         2.17    0.43    0.51       1.69       2.23      5.06         3.69
VII. ENTERTAINMENT                                             6.43       8.09       7.35       8.22           9.33         8.26    7.90    8.62       8.85       9.69      8.02         8.57
VIII. EDUCATION                                                3.07       2.09       1.07       0.77           0.65         1.06    1.43    0.55       0.83       0.33      0.37         0.42
IX. HOTELS, BARS AND RESTAURANTS                              11.95      11.99      12.00      12.00          11.98        11.99   11.99   11.97      11.97      11.99     11.98        11.98
X. DIVERSE GOODS AND SERVICES                                  4.43       4.59       4.10       6.43           6.10         5.53    7.35    6.95       6.38       7.16      7.28         7.14
      TOTAL                                                    2.13       2.45       3.13       3.60           4.42         3.38    2.45    2.88       3.21       4.07      4.90         4.15


                         AREA                                                    NATIONAL DISTRICT                                                 DOMINICAN REPUBLIC
                        QUINTILE                                  1          2          3           4             5   Average          1       2           3           4       5   Average
I.    FOOD                                                     1.38       1.22       1.35        1.58          1.95         1.67    1.28    1.17        1.25        1.49    2.08         1.58
II. CLOTHING                                                   9.29       9.79       9.31       10.17          9.52         9.64    7.82    8.97        8.86        8.92    8.97         8.91
III. HOUSING, UTILITIES                                        0.13       0.35       0.41        0.21          0.22         0.23    0.58    0.46        0.76        0.48    0.27         0.39
IV. FURNITURE, TEXTILE ITEMS, HOUSE EQUIP., MAINTENANCE        5.91       7.83       8.56        9.03          9.48         9.23    5.31    6.73        7.89        8.80    9.35         8.79
V. HEALTH                                                      0.05       0.10       0.26        0.08          0.07         0.08    0.10    0.02        0.08        0.09    0.07         0.08
VI. TRANSPORTATION                                             0.17       0.48       0.79        1.04          4.89         3.96    0.37    0.67        1.50        1.81    4.74         3.51
VII. ENTERTAINMENT                                             7.75       7.92      10.23        9.82          9.53         9.61    6.97    8.25        9.09        9.47    8.96         9.00
VIII. EDUCATION                                                0.22       0.21       0.35        0.38          0.13         0.18    1.21    0.81        0.70        0.40    0.22         0.32
IX. HOTELS, BARS AND RESTAURANTS                              11.99      12.00      11.99       11.98         11.99        11.99   11.98   11.99      11.99       11.99    11.99        11.99
X. DIVERSE GOODS AND SERVICES                                  9.75       8.19       8.55        9.82         10.06         9.84    6.82    6.73        6.76        8.18    8.68         8.24
      TOTAL                                                    2.61       3.25       3.73        4.18          4.68         4.37    2.32    2.80        3.35        4.00    4.72        4.083




                                                                                                 20
TABLE 8
THE EFFECTIVE TAX RATES UNDER THE REFORM TAX SYSTEM AT THE 12% RATE, BY COMMODITY, BY QUINTILE, AND BY AREA
(Percentage)

                             AREA                                                        REST RURAL                                                   REST URBAN
                            QUINTILE                                   1          2          3          4         5   Average          1       2          3          4         5   Average
I.       FOOD                                                       2.14       1.97       2.12       2.34      2.95         2.31    2.24    2.09       2.00       2.28      3.03         2.44
II.      CLOTHING                                                   7.71       8.40       8.64       8.43      8.47         8.43    7.32    9.29       8.74       8.32      8.43         8.47
III.     HOUSING, UTILITIES                                         2.08       1.67       3.30       1.94      1.47         2.13    1.91    1.62       1.44       1.61      1.14         1.40
IV.      FURNITURE, TEXTILE ITEMS, HOUSE EQUIP., MAINTENANCE        8.19       8.77       8.83       9.06     10.26         9.40    7.97    7.95       9.03       9.84      9.53         9.44
V.       HEALTH                                                     6.69       6.96       6.10       7.31      8.98         7.81    7.63    7.77       8.13       7.89      8.43         8.21
VI.      TRANSPORTATION                                             8.64       8.10       7.06       6.83      5.02         6.54    9.18    7.88       7.33       6.13      6.01         6.39
VII.     ENTERTAINMENT                                              6.61       8.23       7.35       8.36      9.44         8.37    8.02    8.74       9.09      10.18      9.20         9.40
VIII.    EDUCATION                                                  8.60       8.16       9.90       8.80     10.24         9.50    9.40   10.41       9.19       9.93     11.17        10.66
IX.      HOTELS, BARS AND RESTAURANTS                              11.95      11.99      12.00      12.00     11.98        11.99   11.99   11.97      11.97      11.99     11.98        11.98
X.       DIVERSE GOODS AND SERVICES                                 8.92       9.31       8.42       9.23      9.35         9.12   10.31   10.23      10.42      10.14     10.09        10.15
         TOTAL                                                      4.36       4.37       4.82       5.30      6.13         5.17    4.74    4.92       5.18       5.95      6.86         6.12


                             AREA                                                     NATIONAL DISTRICT                                            DOMINICAN REPUBLIC
                            QUINTILE                                   1          2          3           4        5   Average          1       2           3           4       5   Average
I.       FOOD                                                       2.25       2.18       2.28        2.51     3.01         2.66    2.18    2.06        2.12        2.38    3.00         2.48
II.      CLOTHING                                                   9.29       9.79       9.31       10.17     9.52         9.64    7.82    8.97        8.86        8.92    8.97         8.91
III.     HOUSING, UTILITIES                                         1.62       1.16       1.18        0.83     0.51         0.66    1.86    1.48        1.64        1.27    0.69         1.02
IV.      FURNITURE, TEXTILE ITEMS, HOUSE EQUIP., MAINTENANCE        7.76       9.35       9.83        9.97    10.00         9.93    8.06    8.70        9.20        9.73    9.90         9.66
V.       HEALTH                                                     7.29       6.70       7.01        7.28     8.91         8.44    7.16    7.15        7.16        7.53    8.78         8.23
VI.      TRANSPORTATION                                             9.30       8.73       8.21        5.72     5.38         5.73    8.89    8.15        7.48        6.15    5.54         6.12
VII.     ENTERTAINMENT                                              8.30       8.61      10.43       10.20    10.35        10.27    7.19    8.49        9.26        9.85    9.84         9.63
VIII.    EDUCATION                                                  9.03       8.85       9.56       10.18    10.87        10.65    9.01    9.36        9.50        9.94   10.94        10.57
IX.      HOTELS, BARS AND RESTAURANTS                              11.99      12.00      11.99       11.98    11.99        11.99   11.98   11.99      11.99       11.99    11.99        11.99
X.       DIVERSE GOODS AND SERVICES                                11.52       9.74      10.25       10.72    10.17        10.28   10.07    9.89      10.01       10.27    10.08        10.11
         TOTAL                                                      4.91       5.14       5.66        6.03     6.52         6.24    4.58    4.75        5.22        5.84    6.58         5.97




                                                                                                  21
Table 9
The Effective Tax Rates using Annual Household Income as the Measure
(Percentage)

The 1998 Tax System
 Quintile               1      2      3      4      5    Average
 Rest Rural           0.52   0.87   1.11   1.44   1.60    1.18
 Rest Urban           0.53   0.85   1.00   1.36   1.82    1.38
 National District    0.63   1.09   1.29   1.51   1.68    1.54
 Total                0.54   0.91   1.12   1.43   1.71    1.40

The Current Tax System
 Quintile              1       2      3      4      5    Average
 Rest Rural          0.82    1.34   1.78   2.24   2.57    1.86
 Rest Urban          0.83    1.31   1.55   2.13   3.01    2.22
 National District   0.97    1.67   2.00   2.35   2.85    2.54
 Total               0.85    1.41   1.76   2.24   2.86    2.28

The Reform Tax System
 Quintile             1        2      3      4      5    Average
 Rest Rural         1.67     2.39   2.75   3.30   3.57    2.85
 Rest Urban         1.61     2.24   2.51   3.12   4.21    3.27
 National District  1.82     2.64   3.03   3.40   3.97    3.62
 Total              1.68     2.39   2.74   3.26   4.00    3.33




                                                             22
                                                            CHART 1
                                    THE NATIONAL EFFECTIVE TAX RATES FOR VARIOUS SCENARIOS


                         7.00
                         6.80
                         6.60
                         6.40
                         6.20
                         6.00
                         5.80                                                                The reform tax system
                         5.60
                         5.40
                         5.20
Effective tax rate (%)




                         5.00
                         4.80
                         4.60
                         4.40
                         4.20
                         4.00
                         3.80                                                                The current tax system
                         3.60
                         3.40
                         3.20
                         3.00
                         2.80
                         2.60
                         2.40
                         2.20                                                                  The 1998 tax system
                         2.00
                         1.80
                         1.60
                         1.40
                         1.20
                         1.00
                                1           2                      3                    4                    5
                                                          Expenditure quintile




                                                             23
                                                            CHART 2
                                    THE NATIONAL EFFECTIVE TAX RATES FOR VARIOUS SCENARIOS

                         4.20
                         4.00
                         3.80
                         3.60
                         3.40                                                                The reform tax system
                         3.20
                         3.00
                         2.80
Effective tax rate (%)




                         2.60
                         2.40
                         2.20                                                                The current tax system
                         2.00
                         1.80
                         1.60
                         1.40
                                                                                               The 1998 tax system
                         1.20
                         1.00
                         0.80
                         0.60
                         0.40
                         0.20
                         0.00
                                1            2                      3                 4                      5
                                                           Expenditure quintile




                                                              24
                                         Appendix A

                           Calculation of the Effective Tax Rate
                           Based on the National Accounts Data

The total tax collections of the ITBIS in 1998 were RD$7,178.4 million, consists of
RD$3,697.5 million from domestic ITBIS registrants and RD$3,480.9 million from
imports at Customs. In calculating the overall effective tax rate for private consumption,
one has to derive:

        -   the taxes paid by the Dominican residents, which can be obtained by netting
            out the taxes paid by governments and by non-residents; and
        -   the private consumption, which can be obtained directly from national
            accounts.

Details of the Central Government expenditures on goods and services are available and
can be found in the following categories:

        -   personal services (mainly wages and salaries);
        -   non-personal services (including communication services, advertisement,
            travel expenses, transport and storage, rent, insurance, etc.);
        -   materials and supplies (including food and agricultural products, textile and
            clothing, paper and printing products, leather and rubber products, chemical
            products, metal products, non-metal products, etc.);
        -   machinery and equipment (including transport equipment, medical and
            sanitation equipment, tools and major parts, operational equipment, etc.);
        -   real estate acquisition (including building, works for demolition, etc.); and
        -   construction of works and agricultural plants (including communication
            facilities, hydraulic and sanitation works, works for soil conditioning and
            agricultural plants, repairement, work inspection, etc.).

Each of the categories contains fairly detailed goods and services that allow us to identify
whether the item is subject to tax under the ITBIS.

The data of the expenditures spent by foreigners and non-resident Dominicans are
obtained from the National Association of Hotels and Restaurants, Inc.18 This data
contain the information about the number of foreign tourists per year, how many of them
stay in hotels, the number of days stayed in hotel, the total expenditures spent and the
breakdown of their expenditures by lodging, entertainment, gift, transportation, and so on.
The same information was also collected from non-resident Dominican. With this
information, one can estimate the amount of the ITBIS paid by non-residents.


18
  National Association of Hotels and Restaurants, Inc. (ASONAHORES), Santo Domingo, Dominican
Republic, Selected Statistics for the Tourist Sector, 2003, ( 2003).


                                               25
In summary, the ITBIS paid by residents in 1998 can be calculated as follows:

         Total tax collections                       RD$7,178.4 million
       - Taxes paid by the Central Government        RD$ 442.7 million
       - Taxes paid by foreign tourists              RD$1,707.4 million
       - Taxes paid by non-resident Dominicans       RD$ 215.9 million

        Taxes paid by residents                      RD$4,812.4 million

Therefore, the overall effective tax rate was approximately 2.57 percent (=
4,812.4/187,513.2). This is slightly overstated because the taxes paid by local
governments were not subtracted out from the total tax collections.




                                            26
                                         References

Carlson, George N. and Melanie K. Patrick, “Addressing the Regressivity of a Value-
Added Tax”, National Tax Journal, Vol. 42, No. 3, (September 1989).

Caspersen, Erik and Gilbert Metcalf, “Is a Value Added Tax Regressive? Annual Versus
Lifetime Incidence Measures”, National Tax Journal, Vol. 47, No. 4, (December 1994),
pp. 731-46.

Dominican Republic, Department of National Accounts and Economic Statistics,
National Household Survey of Expenditures and Incomes, October 1997 to September
1998, (July 1999).

Guiliani, Hector Cury, Glenn P. Jenkins and Chun-Yan Kuo, “Fiscal Adjustment for
Sustainable Growth in the Dominican Republic”, paper prepared for the Government of
the Dominican Republic, (March 2004).

Horwath, Sotero Peralta & Asociados Members of Horwath International and Russin,
Vecchi & Heredia Bonetti L.L.P., Tax Code of the Dominican Republic, Title III on the
Tax on the Transfer of Industrialized Goods and Services, (October 1997).

Isa-Contreras, Pavel and Edgar Morales, “Fiscal Potential and Equity: Elements for
Discussion in the Case of the ITBIS”, paper prepared for the Department of Economic
Studies, Ministry of Finance, Dominican Republic, (February 2004).

Jenkins, Glenn P. and Andres H. Arroyo Pelaez, “Evaluation of the Tax Progressivity of a
Single Rate Broad Based Value Added Tax in a Low Income Country: The Case of
Bolivia”, paper prepared for Viceministerio de Politica TRibutaria, Ministerio de
Hacienda, Bolivia, (September 2003).

Metcaff, Gilbert, “Lifecycle vs. Annual Perspectives on the Incidence of a Value Added
Tax”, Tax Policy and the Economy 8, (1994), pp. 45-64.

National Association of Hotels and Restaurants, Inc. (ASONAHORES), Santo Domingo,
Dominican Republic, Selected Statistics for the Tourist Sector, 2003, ( 2003).




                                          27

				
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