VAT and household consumption patterns in Morocco (Note)

Abstract :

· The purpose of this article is to address the various problems associated with the VAT system in Morocco.

· The use of the 2007 Moroccan household living standards survey allows these dysfunctions to be visualized.

· The system of VAT exemptions for certain products benefits the wealthy four times more than the poor.

In a context where public resources earmarked for poverty reduction are the focus of attention and where the liberalization of foreign trade is reducing import revenues, Morocco must maintain public balance in order to continue investing in infrastructure and human capital. Significant tax revenues should be subject to a judicious policy to ensure equitable redistribution among citizens, particularly the poor, in order to reduce social inequalities.

Given its significant share (31.7%) of the Moroccan government’s tax revenues, VAT plays an important role in these fiscal policies. It is in line with the principles of justice and equity, in accordance with the principle of equality for all before the tax system. The fiscal transition policies (reduction of tax rates, greater application of exemptions, etc.) implemented in Morocco have sought to rely on VAT because of its economic neutrality, while avoiding reliance on income tax or corporate tax due to their narrow bases. The integration of VAT into prices poses two problems: on the one hand, VAT imposes the same burden on all taxpayers, whether rich or poor. On the other hand, households with the same standard of living are disadvantaged, insofar as their tastes, preferences, and consumption patterns may naturally differ.

The purpose of this article is to study the contribution of various segments of the population to VAT. It then aims to measure the weight of VAT in household budgets in Morocco and to assess the cost of exemptions or reduced rates to the state budget and household budgets. Finally, it seeks to explain how this tax affects the consumption of different household groups differently, especially the poor. To do this, we used data from the 2006/2007 national survey on household living standards conducted by the High Commission for Planning.

Consumption structure and VAT paid by Moroccan households

The survey on household living standards (2007)[2] shows that the average annual expenditure per person in 2007 was 11,222 dirhams (DH). In 2001, it was 8,280 DH. This improvement benefited both urban and rural areas. In urban areas, consumption rose from 10,642 DH in 2001 to 13,894 DH in 2007, an increase of 4.5% per year. In rural areas, it rose from 5,288 to 7,752 dirhams (an increase of 6.5%). As a result, the gap between spending in the two areas of residence has narrowed somewhat. This rise in living standards between 2001 and 2007 benefited all households, particularly poor and vulnerable populations.

The survey results also show that the overall improvement in living standards significantly reduced poverty and vulnerability between 2001 and 2007. Poverty[3]fell from 15.3% to 9% nationally, from 7.6% to 4.8% in urban areas, and from 25.1% to 14.5% in rural areas. Vulnerability[4] fell from 22.8% to 17.5% nationally, from 16.6% to 12.7% in urban areas, and from 30.5% to 23.6% in rural areas.

Breakdown of Moroccan household expenditure and VAT paid by item[5]

From the table above, we can see that food expenditure ( including tobacco purchases) continues to occupy first place in the household budget, accounting for 43% in 2007 compared with 44.1% in 2001, a decrease of 1.1%. Furthermore, this structure shows that spending on housing and energy (rent and home maintenance, water and electricity costs) ranks second in household budgets, even though its share has declined (20% in 2007 compared to 22% in 2001, a decrease of 2 points).

The  » transport and communication »group comes in third place with an average annual expenditure of MAD 1,308 per year, up 112% compared to 2001. This group recorded the highest increase compared to the others (4.70%). This increase can be explained firstly by the development of telecommunications in Morocco between 2001 and 2007 (the introduction of mobile telephony, the internet, etc.) and secondly by the increase in oil prices during the same period, which led to higher transport costs.

Despite the large share of  » food, beverages, and tobacco  » and  » housing and energy expenses  » in Moroccan household consumption, they generate only 24% and 13% of VAT, respectively, while « transportation and communications » alone generates 27% despite its relatively small share (12%). 24% and 13% of VAT, respectively, while the  » transport and communications  » category alone generates 27%, despite its relatively small share (12%). This is explained by the fact that most of the products in the first two categories are exempt or lightly taxed.

Budget coefficients for Moroccan, Tunisian, and French households (in %)[6]

Comparing the expenditure structures of Tunisia (2005) and France (2006) with that of Morocco (see table above), we note that in Tunisia, as in Morocco, food is still the largest budget item, followed by housing, while the order of these two items is reversed in France. This can be explained by differences in development and culture. Despite this difference, we note that the share of health expenditure in France is relatively low compared to that of Morocco and Tunisia. This can be explained by the fact that a large part of these expenses are covered by the public health insurance system.

Tax effort and expenditure in Morocco

The table below shows that the VAT tax system in Morocco is fairly progressive, i.e., relatively pro-poor: the higher the standard of living, the higher the VAT paid. However, this must be qualified, as this progressivity remains relative. The table below shows the distribution of tax expenditure by quintile, in terms of VAT not paid either in full (zero rate) or in part (7%, 10%, and 14% rates).

The tax burden on households by population stratum[7]

We can see that the shortfall in revenue for the budget (the implicit subsidy) is higher for wealthy households than for poor households. It represents 38% for the former and 5% for the latter. This is due to the high consumption of wealthy households. In fact, the shortfall in government revenue on untaxed products (particularly food) is four times higher for wealthy households (quintile 5) than for poor households (quintile 1).

Distribution of tax expenditure by quintile

On the other hand, from the households’ point of view, the greater the gain from the exemption in relation to total household expenditure, the more precarious their situation. The lifting of the exemption should therefore be accompanied by compensatory measures, such as targeted transfers to the households concerned.

Overall, we find that the share of tax expenditure that benefits wealthy households costs the state budget much more than that which benefits poor households. And that the gains made by households are mainly in the area of exempt products. Thus, in order for taxation to be more « redistributive, » gains should be better distributed between exempt products and those that are lightly taxed, according to income strata.

Determinants of VAT paid and the effect of taxation on « cereals and cereal-based products » on consumption

Modeling work was carried out to identify the main determinants of VAT paid in Morocco and assess the impact of an increase in the VAT rate on household consumption.

With regard to the determinants of VAT paid, it appears that the fact that a household is headed by a woman reduces the amount of VAT, as these households are relatively precarious compared to those headed by men and therefore have lower consumption. On the other hand, when per capita expenditure (a proxy for per capita income) increases by 1%, all other things being equal, the amount of VAT paid increases by 1.24%. We note that the amount of VAT paid increases more than proportionally as consumption increases. Indeed, when households’ standard of living improves, they tend to consume higher-quality (heavily taxed) products.

With regard to modeling Moroccan demand, we attempted to simulate the impact of a reform consisting of taxing the « cereals and cereal-based products«  group at a VAT rate of 10%. This estimate shows a significant drop in consumption of products in the « meat  » and « milk, whey, and eggs » groups among the poorest segment of the population, while for the wealthy, this tax has no effect on their income. The precarious situation of the poor means that they will use their surplus income first and foremost to better satisfy their needs for these products, which are less « luxurious » than meat or dairy products.

Conclusion

The various results obtained show that the VAT system in Morocco is not fair, contrary to its basic principle of justice and equity. In fact, exemptions and reduced tax rates only benefit the wealthy. Furthermore, the taxation of basic products (flour, wheat, etc.) can harm the consumption of essential nutritional products, such as meat and milk, by the poor. Therefore, it is necessary to take into account this set of dysfunctions related to VAT taxation. VAT reforms should therefore include a single tax rate accompanied by compensatory measures to support consumption among the poor.