Reforming Taxes and Improving Health: A Revenue-Neutral Tax Reform to Eliminate Medical and Pharmaceutical VAT

The aim of this paper is to analyse a tax reform consisting of an increment of the indirect taxes on alcohol and tobacco to finance the elimination of VAT on health and pharmaceutical services. We first estimate an Almost Ideal Demand System for the purpose of evaluating expenditure and price elasticities. We then micro-simulate the abolition of VAT on health services combined with a increment on alcohol and tobacco excise duties, so that total revenue remains unchanged. This reform would generate small private and social welfare gains complemented with externalities derived from the tobacco and alcohol demand cut.