Tax Composition and Income Inequality in Sub-Saharan Africa

Abstract

The study examined the differential effect of income and consumption tax on income inequality in Sub-Saharan Africa and their thresholds effect. The study used 26 countries from SSA and data collected from 1990 to 2017. The study used the GMM panel estimation methods in achieving the objectives of the study. The results of the study revealed that the income tax is significant in reducing income inequality in SSA but it has a threshold effect beyond which it turns to increase income inequality. Also, consumption tax does not have any significant effect on income inequality in sub-Saharan Africa and the threshold effect is also not significant. The study recommends that the governments of sub Saharan Africa in conjunction with fiscal authorities like Ministry of finance of these countries should focus on income tax if they wish to reduce income inequality. The fiscal authorities in SSA countries should set an optimal income tax rate of 9.2 percent which is necessary to reduce income inequality to boost economic activities