*Taxes alone will not close the wealth gap in Africa/ Oxford Analytica 20.07.16*
Taxation could play a role in addressing inequality, but the form and efficiency of taxes will determine success Economic inequalities in African countries have failed to decline significantly despite gradual growth in per capita GDP over the past several years. Progressive taxation is weak in many countries, but improving this source of revenue alone will not close the inequality gap for some of the world's poorest. What next Lack of strong trade unions or leftist parties across much of the continent, combined with the prevalence of ethnic politics, will limit pressure on governments to introduce progressive taxation. Despite economic growth, inequality is likely to persist, undermining the potential for grassroots entrepreneurial activity to drive long-term economic growth. Subsidiary Impacts · Political patronage and fear of elite emigration will discourage politicians from proposing progressive taxes. · If introduced, higher taxes would only reduce inequality if collected transparently and invested in services for those with low incomes. · Low income tax rates will limit revenue flows to fund major infrastructure projects, especially if other revenue sources are depressed. Analysis For several years, debates about inequality in Western societies have featured prominently in politics Income disparity and the societal implications of inegalitarian societies are not restricted to developed economies; societies in sub-Saharan Africa (SSA) also feature gaps between the wealthy and poor. Despite two decades of economic growth and gradual poverty reduction in many SSA countries, inequality levels in many places have not fallen Inequality in Africa is high despite a gradual reduction in poverty The oft-cited culprits of inequality -- corruption and poor service delivery -- have contributed in part, but the relative absence of progressive taxation may also play a role. Inequality Overall inequality on the continent has increased in recent years, but much of this is related to increasing inequality between different countries rather than within states. While there is no evidence that inequality is systematically rising within countries, there are very few examples of it falling. The benefits of the last two decades of economic growth are predominantly being enjoyed by the wealthy. For example, the World Bank estimates that 40% of the growth in consumption between 1993 and 2008 went to the top 5% of the wealth distribution. Significantly, inequality in SSA countries is considerably greater than in other developing economies as measured by gini coefficients <http://hdr.undp.org/en/content/income-gini-coefficient> or the ratio between top and bottom earners. Gini coefficients for African countries have a mean of 0.43 compared to the developing countries' mean of 0.39. The ratio of the income of the top 20% to the bottom 20% for African states has an average of 10.18 while other developing countries have an average ratio of 8.91, which illustrates disparities at the extremes of the income spectrum. Countries such as Botswana and South Africa are widely recognised as some of the most unequal societies in the world. The millionaires club Consistent economic growth and valuable natural resources have propelled wealth accumulation among the top quintile of SSA populations. According to a 2015 report <http://www.afrasiabank.com/en/latest-news/the-top-african-cities-for-millionaires>, there were approximately 163,000 African millionaires in mid-2015, many residing in Johannesburg, Lagos, Cape Town and Nairobi The number of millionaires in major cities is projected to increase by between 35% and 78% over the next decade. With a growth in wealth, improved taxation would provide states with a welcomed revenue stream. Tax Base Historically, SSA states have raised most of their revenue from trade taxes and international transfers. In the 1980s, large informal sectors, weak taxation enforcement capacity and high levels of corruption meant that few wage earners paid income tax. In addition, governments feared that raising taxes could foment political instability or exacerbate the twin processes of capital flight and brain drain. Taxes today While tax evasion remains a serious concern, the picture may be changing. Shifts in governance and economies are allowing for more domestic revenue collection, notably through trade liberalisation, the professionalisation of revenue authorities and the growing wealth among high earners. Further, declining prices for oil, copper and other natural resources are increasing the proportion and importance of revenue generated from income and sales taxes. Income tax Comparing income tax systems across countries is difficult because the overall impact depends on the threshold at which people start paying tax, the rates for various income levels and the maximum rate that high-income earners pay. In general, highly compensated individuals in SSA are subject to a lower tax burden than elsewhere in the world, despite frequent complaints that they are overtaxed. SSA income tax rates are particularly low when compared to states with a history of social democracy: in these countries, high rates of taxation on top wage earners are typically redistributed to fund essential public services. Sales taxes The last two decades have seen a significant expansion, and to some extent harmonisation, of value added tax (VAT) -- or sales tax -- in SSA. IMF and World Bank policies are in part responsible for these changes. Although there are many merits to well-designed VAT, it tends to have a regressive impact since sales taxes comprise a far greater share of the income of poorer households than of the wealthy. Therefore, relatively high rates of VAT across SSA could be consolidating existing inequalities. Tax and inequality The relationship between taxation and inequality is controversial. While low taxes on the biggest wage earners can sustain vast wealth differentials, the imposition of higher income taxes does little to reduce inequality if revenues cannot be effectively collected, tax payers can evade higher rates and additional revenue is lost through corruption or mismanagement. The latter point is particularly salient in the SSA context. Wealth disparities are large, and the lowest income earners are among the poorest in the world. Yet some of the countries with the most high-net-worth individuals also have poor track records of using public revenue wisely ( Countries will the most high-net-worth individuals have poor track records for wisely using tax revenue Kenya, Nigeria and South Africa have all suffered major corruption scandals in recent years. South Africa also suffers from particularly poor returns from government investment in education, a key to reducing inequality over time The other half These issues are not purely political or ideological. Those at the bottom end of the income spectrum have not enjoyed the kind of improvement in their standard of living that afford opportunities to start a business or educate their children. Bringing progressive taxes to the political agenda in many countries would require overcoming current interests that maintain tax regimes. Even then, growing wealth and improved taxation alone will not alone address income gaps. -- To post to this group, send email to [email protected] To unsubscribe from this group, send email to [email protected] Visit this group at https://groups.google.com/d/forum/southsudankob View this message at https://groups.google.com/d/msg/southsudankob/topic-id/message-id For more options, visit https://groups.google.com/d/optout --- You received this message because you are subscribed to the Google Groups "South Sudan Info - The Kob" group. To unsubscribe from this group and stop receiving emails from it, send an email to [email protected]. 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