Expedience of differentiation of the value added tax rate imposed on foodstuffs in Estonia
Institute of Economics and Social Sciences, Estonian Agricultural University, Kreutzwaldi 64, 51014 Tartu, Estonia; e-mail: email@example.com
Changing the principles of imposing income tax and cutting down the rate of value added tax imposed on food has been discussed in Estonia during the last years. The possible impact of reduction of the value added tax rate, imposed on foodstuffs, on the disposable income of Estonian households was analysed for the period 2002-2003. Households were distributed into five income groups, and the effect arising from discussed changes in the value added tax was calculated for all income groups. In order to compare it with the result of VAT differentiation, the impact of linking of the basic exemption rate and gross minimum wages to the income of households was analysed as well. Due to the insignificant impact on the disposable income of households, a proposal to reduce the rate of value added tax imposed on food is not well-grounded and there is no justified need to drop it from current 18% to 5%.