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The distributional impact of tax and benefit systems in six African countries
Katrin Gasior
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Dr Chrysa Leventi
Prof Michael Noble CBE
Prof Gemma Wright
Dr Helen Barnes
At the core of the African Union’s agenda is a prosperous Africa based on Inclusive Growth and Sustainable Development, which – among others – should be achieved through better social security systems
This, however, requires better knowledge of current systems in place and the extent they provide support and contribute to redistribution. This contribution provides such an assessment for Ethiopia, Ghana, Mozambique, South Africa, Tanzania and Zambia – using the SOUTHMOD tax-benefit models.
Poverty and inequality in this part of the world is mostly measured using consumption data. This is justified by the high importance of ownconsumption and the low share of people in employment but at the same time fails: • to measure direct effect of taxes and benefits reflected in the level of disposable income; and • to acknowledge that households with similar consumption levels might have very different income levels (e.g. one household might need to spend 100% of the income while another one manages to save). The percentage of countries using income to measure poverty has risen over time and is associated with rising living standards (World Bank 2018 9 ). Accordingly, income-based measures for low- and middle-income countries provide important opportunities for measuring in-country progress. Our research presents indicators using different income concepts – see Figure 1. The concept of post-fiscal income shows how much of their disposable income individuals are able to consume by also accounting for indirect taxes (in this case Value Added Tax only).
Overall, the country with the most effective tax–benefit system in terms of reducing income inequality is South Africa, while the tax-benefit system has almost no impact on inequality in Ghana and Mozambique (see Figure 2, compare Gini using original income and disposable income). With respect to poverty, using the $1.90 per day poverty threshold, South Africa also has the most poverty-reducing tax–benefit system. Alarmingly, the other five countries’ tax–benefit systems have no poverty-reducing properties (see Figure 3, compare poverty using original income and disposable income).
Why do the tax–benefit systems of these countries appear to be mostly ineffective? Our results suggest that with the exception of South Africa, the tax–benefit policies affect only a small minority of each country’s population. Many individuals will be largely unaffected by the tax-benefit system, apart from indirect taxes: the benefits are very narrowly targeted and their amounts are small, and many individuals are too poor to pay direct taxes. In the context of the Sustainable Development Goals to eradicate extreme poverty by 2030 (Goal 1.1) and to achieve substantial coverage of social protection for the poor and vulnerable (Goal 1.3), it is clear that more needs to be done.
With respect to VAT, it was found that this policy increases income inequality in all six countries, the most extreme example being Tanzania. VAT also increases income poverty in all countries, with the highest increase being estimated for South Africa. This is not in itself surprising, as VAT is widely regarded to be a regressive tax, but it demonstrates the role that VAT plays in diluting (or even reversing) the impact of direct taxes and benefits. Regarding direct taxation, Ethiopia’s personal income tax system appears to be the most income-inequalityreducing (see Figure 2, compare Gini using original income plus pensions and benefits and disposable income).
As observed by the World Bank, ‘it has to be acknowledged that the use of income data is likely to lead to a higher estimated poverty count’ (World Bank 2016, 40 10 ). Results indeed show that the income-based measures result in higher levels of poverty and inequality than consumption-based measures. Contribution based on Gasior, Katrin, Chrysa Leventi, Michael Noble, Gemma Wright, and Helen Barnes. 2018. ‘The Distributional Impact of Tax and Benefit Systems in Six African Countries’. WIDER Working Paper, WIDER Working Paper, 2018/155.
Figure 1 Different income concepts used in the research
Original income
Disposable income
Post-fiscal
Employment income; self-employed income (inc. farming) and other market incomes
+ Benefits (cash and in-kind) - Direct taxes - SIC
income
- VAT
Consumption
Including direct taxes
Figure 2 Gini index: 0 indicates low inequality, 100 indicates high inequality
Why do the tax–benefit systems of these countries appear to be mostly ineffective? Our results suggest that with the exception of South Africa, the tax–benefit policies affect only a small minority of each country’s population
Figure 3 Poverty: percentage of people with less than $1.90 per day
Information for Figures 2 and 3: Source Authors’ representation based on SOUTHMOD models. Poverty rate based on consumption retrieved from WDI, World Bank database. Notes Results are based on the policy system 2015. Results for consumption (WDI) refer to different years (2015 for Ethiopia and Zambia, 2016 for Ghana, 2014 for Mozambique and South Africa, 2011 for Tanzania).
Modelling the tax-benefit system and understanding its potentiality in reducing income inequality and poverty is a necessary first step to consider public policy reforms in Latin America
