Question

In the 2017 “Asempa” budget, several tax reforms were proposed including the removal of (i) 5% VAT/NHIL on real estate sales and (ii) excise tax on petroleum products. Focusing on these two taxes provide answers to the following questions.
i. Using the Harberger triangle, explain why this tax reforms were hailed as a source of relief (use appropriate graphs where necessary).

Answer 1

In the 2017 Asenpa budget, there are two types of tax been prosed to remove. a) VAT on real estate and the other one is an excise tax on petroleum. so this situation ios fitted for a Harberger's triangle model.

Harberger's triangle refers to the deadweight loss occurring in the trade of a good or service due to the market power of buyers or sellers or government intervention. it takes the shape of a (curvilinear) triangle in the graph two sides is the demand and supply side wheres the third side is a straight line and determined by the nature of market power and the type of government intervention.

In the figure, the total regions E and F is the Harberger triangle representing the deadweight loss. The triangle E represents the welfare loss to consumers and the triangle F represents the welfare loss to producers.

Note that areas B and C represent welfare losses for producers and consumers respectively, but these losses are captured by the taxing authority, hence these do not represent global welfare losses.

Now when there is a removal of 5% of vat and excise tax the area of B and C will decrease and the deadweight loss area will decrease and the benefit will go to the consumer and the producer.