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Could Fiscal Policies Alleviate Poverty in African Countries?
Could Fiscal Policies Alleviate Poverty in African Countries?

By - Jamel Lahiani

Posted - 05-02-2020

Governments of African countries used education and health policies to stop inequality, especially inequality of opportunity. These policies are financed by direct and indirect taxes. The direct and indirect taxes vary between jurisdictions across African countries, in general, a direct tax is a tax imposed upon a person or property as distinct from a tax imposed upon a transaction, which is described as an indirect tax. The African countries have two stylized facts: the first is a great percent of the population living in the rural zone far from public service developed by the government. The access to public services as education, health, infrastructure and communication still limited. The second is the great importance of the informal sector. A big number of companies don’t exist in the fiscal system.

Many efforts are deployed by governments to install a performed fiscal system in the path to reduce poverty and the construction of a solid economic environment. These efforts are encouraged and supported by the international monetary fund (IMF). Three channels can achieve the objective of alleviating poverty by tax policies.

  • The redistribution of wealth between social categories
  • Tackling the inequality of opportunity inside the population
  • Access to public services as education and health for the poorest population

In sub-Saharan Africa, the average of the public revenues (taxes included) in the percentage of GDP is less than 20% of GDP, but in rich countries, it is more than double. The major problem of African countries is the existence of a strong informal sector and a big number of the population living in the rural zone. That explains the low tax incomes as a percent of GDP. Besides, the imbalance between direct and indirect taxes in total taxes revenue and the paltry amount of revenue from the taxation of businesses and owners of capital. Taxation mainly concerns consumer goods, a potentially regressive phenomenon. So, an accommodated tax policy can increase tax revenue in poor countries to combat inequalities by ensuring that the richest are the most taxed.

African countries experienced a high intervention of the international financial institutions in the tax and regulatory policies. The International Monetary Fund (IMF) and other international institutions have dictated and strongly recommended African countries policies, as a condition of their financial support. The IMF has always fostered economic efficiency and short-term collection goals, often advocating for the easiest tax policies against the wealthy population categories that are easiest imposing politically with the aim of encouraging the business environment. That reduced the capacity of these nations to openly debate different policy options, as well as their ability to control and stem capital
flight and tax evasion. Such tax policies are not necessarily the most appropriate for developing countries.

A comparison of the impact of the tax system before and after instauration for some African countries gives that taxation and transfers lead poor people poorer. In Ethiopia, Ghana, Tanzania, and Uganda, the headcount ratio for the poor is higher after direct and indirect taxes net of transfer’s instauration. In these countries, the fiscal policy increases poverty, meaning that poor and vulnerable are made poorer by taxes and transfers. That is, if we leave aside the efforts made by governments in the sectors of health or education, the poorest would have a higher income level if there were no taxation or transfers. In other words, especially in low-income countries, the poor can often be net payers: they pay more in taxes than what they receive in cash transfers. That is called in the economic literature the fiscal impoverishment.

On the other side, the Ghana experience was characterized by the insaturation of a suitable conceived tax policy for the African environment. It consists of transforming the informal sector in favor of the economy, involving labor unions in order to gradually formalize the informal economy and introducing an innovating tax system.

However, particularly in African countries, financing education and health cost through taxes can leave the poor worse off, with less cash to buy food and other essential goods. If the majority of the population is poor, it is difficult to tax it, even if it is with the aim of helping it. In trying to combat inequality with spending on education, infrastructure and health, governments may leave the poor worse off, at least in the short-term. This paradoxical relationship that can take shape between poverty and policies designed to address inequality was announced by the Argentinian economist Nora Lustig.

Why the tax policy is inefficient to alleviating poverty in African countries?

Even if we can surpass the problem of the huge informal sector in Africa, it is hard to apply a system of taxation. In fact, the tax is mainly addressed to the poorest and specifically the consumption transactions and escapes the revenue of wealthiest, as well as national and international businesses. It is ironic that the exemptions of wealthiest, as well as national and international businesses attract value-added investments that can have a positive impact on development.

The Tax frauds of medium and large enterprises violate systematically the rights of poor and vulnerable workers. Developing countries have great responsibility by their companies working in Africa, escaping the tax system without contributing to alleviating poverty of these countries considered as Opaque territories or tax havens. The International Monetary Fund (IMF) has also a great responsibility because it has a shot-term objective and promotes the easiest fiscal policies that are favorable to the limited wealthiest segments of the population. These taxes are easier to collect but are not the most appropriate for alleviating poverty in African countries.

The impact of tax policy instauration on the redistribution of wealth and their negative impact on the poorest segment of the population were not analyzed in sufficient depth before their introduction. That’s why a rethinking of tax policy in African countries has great importance to succeed in achieving the goal of alleviating poverty. Historically, the International Monetary Fund (IMF) policies in African countries don’t lead to fairer tax systems. Donors could have the chance to correct the situation by assisting African countries to build fairer tax systems and to make tax collection more efficient and effective

  • The formalization of part of the informal economy
  • Limiting tax evasion to tax havens
  • Reducing tax exemptions
  • Using sophisticated data management software
  • Better collecting direct taxes, in particular, those on non-salaried income

A fairer tax system is extremely needed for African countries to surpass the problems of poverty, fight inequality, and build stronger and more accountable states. The failure of fiscal policies in African countries was due to intern factors and amplified by the international monetary fund (IMF) and foreign investors pushing governments for lower taxation systems favorable to the wealthiest.

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