Who benefits from food tax exemptions in lower-income settings? Evidence on pass-through and incidence

Tax exemptions for basic items exist worldwide, typically justified by governments as a way to reduce the cost of living for poorer households. We study the unanticipated removal of consumption taxes on selected food items in Papua New Guinea by conducting a difference-in-differences analysis using administrative data, a supermarket price census, web-scraped online prices, and a nationally representative, household phone survey panel. We find complete pass-through in formal supermarkets in central urban districts, where retail competition is strong, but no pass-through in informal stores or rural areas, where poorer households mainly shop. Only 16 percent of the foregone revenue accrued to the poorest two quintiles, while the richest two quintiles and stores/wholesalers each captured almost 40 percent of the benefits. This degree of regressivity and variation in pass-through was unanticipated by 237 experts who participated in a prediction survey. Using a static MVPF-style comparison, we show that universal cash transfers would generate roughly two and a half times as much Q1-weighted value per fiscal dollar as the tax exemption. Our findings demonstrate that food tax exemptions are inherently regressive in lower-income settings, due to high informality, substantial market segmentation, and positive income elasticity of demand for basic food.