Personal income tax, redistribution and income inequality in Sub-Saharan Africa

Abstract

AbstractWe assess the roles of personal income tax and fiscal redistribution in income inequality for 30 Sub-Saharan Africa economies from 1980 to 2020, employing the dynamic common correlated effect and cross-sectional augmented autoregressive distributed lag estimators. Empirical results show that personal income tax positively affects income inequality in the full sample SSA economies. Compared to the full sample, the magnitude of the effect remains positive but smaller for non-least developed countries (countries not classified as least developed countries in our sample). However, personal income tax has a negative effect on income inequality for least developed countries. Additionally, fiscal redistribution increases inequality in Sub-Saharan Africa economies and non-least developed countries, while it lowers inequality for least developed countries. Interestingly, fiscal redistribution reduces the level of the positive impact of personal income tax on inequality over the full sample. The main policy implication of this research is that well-designed redistributive fiscal measures associated with anti-corruption policy and good governance may help policymakers to reduce the positive effect of personal income tax on inequality in Sub-Saharan Africa economies.