Shouldn’t essential goods be taxed at lower rates to help the poor?

Rice, cooking oil, a bar of soap—these are essential things no household can do without, and on which the poor spend most of what they earn. There is an argument for taxing them lightly, because the poor spend most of their income on these items.

But a low rate on an essential item is not a well-targeted support because it does not discriminate between beneficiaries. It is a discount for everyone who buys those things—and the rich buy more of almost everything. Cut the tax on ghee, and a well-off family that runs through several tins a month saves far more, in rupees, than a poor household buying a small pouch now and then. Because richer households consume more in absolute terms, most of the revenue the government gives up ends up with them, not the poor it was meant to help.

The same holds across a whole economy. In Mexico, when food and other essentials were exempted from VAT, out of every $100 of revenue forgone, less than $5 reached the poorest tenth of households, while more than $20 reached the richest. Sri Lanka’s exemptions ran the same way: about $41 per person for the poorest tenth against $208 for the richest.

And the revenue forgone could have funded cash transfers, clinics or schools—help that can be directed to the poor, rather than handed to everyone who buys cooking oil. Rupee for rupee, that targeted spending usually does more for the poorest than a rate cut the rich enjoy alongside them. Taxing essentials lightly feels like helping the poor; but when measured by how much actually reaches them, it is among the least effective ways to do it.