Taxation and Inequality

International Tax Academy on Tax Justice:

Financing Development in Africa
Claire Kumar
Kenya
2nd December 2014

Inequality: an issue for our

time
Who is talking about it?

What is behind the acceleration of the debate?

Why do we care?
The moral position

The inequality-poverty connection

Global research: inequality matters significantly in determining

global poverty projections (Peter Edward and Andy Sumner, The

Future of Global Poverty in a Multi-Speed World: New estimates of scale

and location, 2010-2030, Centre for Global Development, 2013

More unequal societies have worse social outcomes

Wilkinson and Pickett, The Spirit Level: Why Equality is Better for

Everyone
Conflict, violence and insecurity

How big is the problem

anyway?
Oxfam: Even it Up: Time

to end extreme
inequality, 2014
85 richest people as

wealthy as the poorest half

of the world
Saez: US income 2009-

2012
Top 1% up 31.4%
Bottom 99% up 0.4%

OECD: 3 decades prior to

2008
Wage gaps widening and

income inequality
increasing in a majority of

And in sub Saharan Africa?

The IMF says:

On average across the region income inequality

appears to be decreasing, but

Their data is old (up to 2005)
Of 40 countries studied:
For 17 it was decreasing
For 9 it was increasing (Niger, Rwanda, Ghana, Cote
dIvoire, Madagascar, Mozambique, Nigeria,
Tanzania, Mali)
14 countries left out (including Angola, Cape Verde,
Comoros, Liberia, Namibia, Zimbabwe)

Francesca Bastagli, David Coady and Sanjeev Gupta, Income

Inequality and Fiscal Policy, IMF Staff Discussion Note,

TJN-A research:
8 countries:
Ghana,
Kenya,
Malawi,
Nigeria,
South Africa,
Sierra Leone,
Zambia,

Zimbabwe

TJN-A findings on inequality

Ghana and Nigeria: income inequality

consistently increasing
South Africa, Kenya and Malawi: fluctuations,
including recent increases
South Africa: note the sharp rise of the top 5%

Zambia: early declines but now rising fast

Sierra Leone: consistent declining trend (but very

limited data)
Zimbabwe: no data

TJN-A findings on inequality:

Nigeria
1986-2010

Ghana
1988-2006

South
Africa
1993 - 2011

Zambia
1993-2010

Change in
income share
of 10% richest

+17%

+20%

+15%

+21%

Change in
income share
of bottom 40%

-9%

-19%

-18%

No change

Word Bank, Poverty and Inequality

Dataset

Why is inequality rising?

The growth model?
The taxation model?

Why tax matters?

To tackle inequality we need:

Redistributive measures

Progressive taxation

Land reforms

Increasing incomes of
the poor

Setting / increasing minimum

wages
Social protection systems (basic
income grants / unemployment
benefits, cash transfers, pensions,
public works schemes etc.)

How much difference does it

make?
Before tax and welfare spending, Germany

and Belgium are more unequal than the US

(Ha Joon Chang)
Inequality in Latin America and the Caribbean

is similar to many developed nations the

differences lies in policies of redistribution

Series of studies in Latin America: they all

suggest slightly regressive tax systems which

far from improving the distribution of income,
actually encourage greater inequality
(ECLAC, The Tax Gap and Equity in LAC,
Fiscal Studies No. 16, 2010)
Absence of studies related to inequality before

and after tax in sub-Saharan Africa

A taxation model gone wrong

Declining top marginal income tax rates (1970s: 70%)

Tax consensus:
ignore redistribution aspects
focus on consumption/sales taxes
Weakening corporate tax contributions
Exemptions/incentives
International corporate tax system not fit for purpose
Poor extractives taxation models
Poor performance of other asset and income taxes
PIT (outside of PAYE); Property tax ; Capital gains
Major challenges taxing High Net Worth Individuals
Enabling financial secrecy and proliferation of use of tax
havens
TJN-A thesis: financial secrecy and tax havens
undermines progressive taxation: Can Africa achieve
progressive taxation in this context?

What can we do about it?

Global wealth tax?
New income tax consensus:
the 1% should pay tax at 80% (Saez and Piketty)

An alternative approach to international corporate

taxation
Reform international tax rules to ensure a fairer

allocation of tax between countries (including

removing the rationale for the use of secrecy
jurisdictions)
Reform countries tax systems which have
particularly harmful spillover impacts
Move from a damaging framework of global tax

What can we do about it?

Refocus revenue authorities (and donor

assistance) on direct taxes of income and

assets
Corporate income tax
Personal income tax

Capital gains tax

Property tax

Enforce minimum standards on data:

Inequality before and after tax (and social spending)
Tax incidence analysis per tax type