The social welfare impact of double tax treaties in Sub Saharan Africa

Abstract

Purpose This study aims to analyze tax revenue in the presence of double tax treaties affecting social welfare of the inhabitants in the Sub-Saharan African (SSA) developing economies, whose fiscal regimes are being branded as responsible for exacerbating poverty for the inhabitants. This paper seeks to determine if double tax treaties are negatively impacting on human development of the host countries. Design/methodology/approach This study analyses 21 SSA countries from 1996 to 2016 using panel models and bootstrapped quantile regression. It uses a devised mathematical model which introduces the interaction between tax revenue and double tax treaties and measures the social welfare impact using the human development index (HDI). Findings The findings have broadly shown that (i) the net effect from the complementarity between tax revenue and double tax treaty (DTTs) in influencing the human development is for the most part negative (ii) the impact of tax revenue from international trade has the most positive net effect as compared to other tax revenues when interacted with the DTT and (iii) the DTT complements the tax revenue from income, profits and capital gains to progressively increase human development in the upper quartiles of HDI. Research limitations/implications This study has examined how the presence of double tax treaties has impacted the effect of tax revenue on human development in 21 SSA countries for the period 1996–2016. A mathematical model was devised and bootstrapped quantile regression was used owing to the specificities of the sample. In accordance with recent literature on net effects, the results were interpreted. Practical implications It is evident that further research is required on whether double tax treaties are indirectly responsible for poverty on the rise in SSA countries or on the contrary, they bring FDI alongside with other positive spillovers which in the end contribute to a rise in the human development aspect of societies in developing host economies. Social implications The HDI is an important measure used nowadays for human development as a proxy for social welfare. This research will use an HDI mathematical model devised by Sinha and Sengupta (2019) and adapt it to the context to testing econometrically whether double tax treaties have an impact on welfare or poverty reduction. The empirical results will help determine whether tax treaties are impacting the social welfare positively or negatively. Originality/value This result is the first research attempt to consider both the impact of tax revenue (which is expected to have a positive impact on social welfare of the people of the host developing countries) and the impact of double tax treaties simultaneously. It is the first empirical study focusing on the impact of tax revenue on human development in the presence of double tax treaties. Its methodology is original and adds to the current literature to benefit policymakers and academia.