Reduction of Income Inequality in Sub-Saharan Africa: Which Fiscal Instrument Matters?

Abstract

The existing literature is inconclusive on the relationship between fiscal instruments and income inequality. Many governments concerned with issues of income redistribution have paid attention to the way in which tax revenues are collected. In this study we shed new light on this issue by empirically investigating which between weight of tax revenues and tax structure used to collect revenues is more important in reducing income inequality in SSA. We use panel data on 34 Sub-Saharan Africa (SSA) countries over the period of 1992- 2014. Our model was inspired by the model developed by Martinez-Vazquez and al. (2012) and modified by Dao and Godbout (2014). We present both conventional fixed effect regressions and instrumental variable analyses, where fiscal instruments using the employment rate and the proportion of the working-age population as an instrument. The results reveal that the fiscal instrument tax revenues are count much more in reducing inequalities than the fiscal instrument used to collect revenues. The results are robust to different econometric specifications.