Abstract
Undoubtedly, one of the primary challenges facing the United Nations Sustainable Development Goals is the widening income disparity within and between countries. Over the past few decades, growing income disparity has attracted a lot of scholarly and governmental attention. Despite being a characteristic of low-income countries, the income gap among citizens has widened in developed countries with rapid economic growth. However, researchers have suggested that despite strong economic growth, efforts to reduce poverty will not succeed until there is a matching decrease in disparity between the rich and the poor. This suggests that reducing poverty and promoting economic growth both depend on the distribution of income. Fiscal policy is broadly seen as an essential tool for ensuring equitable income distribution. However, studies examining the relationship between distributive fiscal policy and income inequality remain heavily dependent on the availability of data in industrialized countries.
Because of data restrictions, Sub-Saharan African (SSA) countries have been largely overlooked, and few studies exist on distributive fiscal policy and income inequality in the sub-Saharan African context. Despite the fact that Sub-Saharan Africa continues to be one of the regions with the highest levels of inequality, there is a huge research gap in the relationship between distributive fiscal policy and inequality. We could also hypothesize that the relationship between distributive fiscal policy and inequality in the SSA may differ from that in industrialized countries. Yet this topic remains unexplored in SSA countries. Therefore, the research objective for this thesis derives from the aforementioned research gap and provides a detailed investigation of the association between distributive fiscal policy and inequality in SSA. 30 SSA countries from 1990 to 2020 is used. The study contains five chapters, except for the first and last chapters, which provide a broad
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introduction and conclusions along with policy recommendations. Each of the five chapters is self-contained and can be considered standalone pieces of research work.
Chapter 2 assesses the association between personal income tax, democracy, and inequality in sub-Saharan Africa, differentiating least-developed countries (LDCs) from non-LDCs. This study uses the dynamic common correlated effect (DCCE) and cross-sectional augmented autoregressive distributed lag (CS-ARDL) estimators. The findings show that progressive personal income tax positively affects income inequality in SSA in the long run, which is not compatible with progressive taxation theory. However, progressive personal income tax reduces income inequality for both least-developed countries (LDCs) and non-least-developed countries. Additionally, a democracy that supports pro-poor redistribution increases inequality in sub-Saharan African economies while lowering it for both least-developed and non-least-developed countries in the long run. Overall, these findings show that high-level democracy that supports pro-poor redistribution may help policymakers reduce the positive effect of progressive personal income tax on inequality in sub-Saharan African economies in the long run.
Chapter 3 investigates the mediating role of fiscal redistribution on personal income tax and income inequality in SSA. This thesis used the cross-sectional augmented autoregressive distributed lag (CS-ARDL) technique. Our findings suggest that personal income tax increases income inequality in both SSA and non-developed countries, but the magnitude of the effect is smaller for non-developed countries. However, personal income tax reduces inequality in least-developed countries. Furthermore, fiscal redistribution increases inequality in sub-Saharan African economies and non-least-developed countries while lowering inequality in least-developed countries. Interestingly, fiscal redistribution reduces the amount of the positive effect of personal income tax on inequality in SSA. Chap 4 assesses the relationship between effective VAT,
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calculated as total VAT revenues divided by final consumption, human capital, and income inequality in SSA. We discovered that effective VAT raises income disparity over the long and short terms. The impact is stronger in the long run than in the short run. The findings also show that human capital development lessens the beneficial effects of EVAT on income inequality in SSA. These imply that, despite the region's diverse social challenges, the EVAT policies and human capital development used in this study promote the reduction of inequality.
Chapter 5 examines the impact of government social expenditure on income inequality in SSA and its regions. This thesis applied Dynamic Common Correlated Effect Instrumental Variable (DCCE-IV) and panel causality estimation techniques. According to our findings, only public education spending reduces economic disparity in sub-Saharan Africa. However, the regional findings reveal that in four regions, public education spending reduces inequality. In contrast, public health spending only reduces it in two regions, which implies that despite the region's diverse social challenges, the social government expenditure policies discussed in this article support the reduction of income inequality. Chapter 6 investigates the synergistic effect of public education expenditure and ICT on income inequality. We applied Fully Modified Ordinary Least Square (FMOLS). The results show that spending on public education and information and communication technology (ICT) helps to lessen economic disparity. The effect of public education spending on income inequality in SSA is interestingly reinforced by the interaction term between public education expenditure and ICT. These results demonstrate that e-education promotion could decrease income disparity. This study recommends that policymakers should consider other inequality reduction measures, such as increasing the minimum wage, progressive taxation, job creation, Information and Communication Technologies, quality of institution, human capital etc. while formulating fiscal policy.
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Keywords: Progressive PIT, Democracy, Fiscal Redistribution, VAT, Government Social Expenditure, Public Education Expenditure, Public Health Expenditure, Human Capital, ICT and Income Inequality.
JEL Classifications: D63, E62, H24, C40, H20, O11, O15, D31, H51, H52, D63, H52, O33