Christopher Hoy (U. Melbourne), Matias Strehl-Pessina (UC Santa Barbara), Ruggero Doino (World Bank), Darian Naidoo (World Bank), Kingtau Mambon (U. Papua New Guinea) & Bobby Kunda (U. Papua New Guinea), Who Benefits from Food Tax Exemptions in Lower-Income Settings?: Evidence on Pass-Through and Incidence, Inst. Fiscal Stud. Working Paper No. 26/55 (Sept. 22, 2026):
Tax exemptions for basic items exist worldwide, typically justified by governments as a way to reduce the cost of living for poorer households. This paper studies the unanticipated removal of consumption taxes on selected food items in Papua New Guinea. It conducts a difference-in-differences analysis using administrative data, a supermarket price census, web scraped online prices, and a nationally representative household phone survey panel. The findings show complete pass-through in formal supermarkets in central urban districts, where retail competition is strong, but no pass-through in informal stores or rural areas, where poorer households mainly shop. Only 16 percent of the foregone revenue accrued to the poorest two quintiles, while the richest two quintiles and stores/wholesalers each captured almost 40 percent of the benefits. This degree of regressivity and variation in pass-through was unanticipated by 237 experts who participated in a prediction survey. Using a static marginal value of public funds–style comparison, the paper shows that universal cash transfers would generate roughly two and a half times as much quintile-weighted value per fiscal dollar as the tax exemption. The findings demonstrate that food tax exemptions are inherently regressive in lower-income settings, due to high informality, substantial market segmentation, and positive income elasticity of demand for basic food.
From the discussion:
[T]his study provides unparalleled evidence in a lower-income setting, illustrating that VAT exemptions are an inefficient way for governments to support poorer households. We build on prior work by being the first to illustrate the regressivity of differential passthrough to prices. Our results also shed novel light on how misperceptions about competition, informality, and the income elasticity of consumer demand for basic foods may explain why policymakers still use VAT exemptions. The contrast between the expert predictions and our findings illustrates that VAT exemptions are even more regressive than initially appreciated and raises questions about the suitability of VAT cuts as an equity enhancing policy instrument in low-income countries, underscoring the need for alternative fiscal policies, such as cash transfers. While concerns remain about the ability to reach poorer households with cash transfers in lower-income settings — characterized by high informality and limited administrative data — we demonstrate that even a poorly targeted social protection program is likely to be much more progressive than VAT exemptions. However, we also show that VAT exemptions are far more popular than alternative policies, such as cash transfers, potentially due to misperceptions about who primarily benefits from them.
