Indirect Taxation and Poverty in Sub-Saharan Africa: An Empirical Evidence from Panel Data Analysis

Abstract

Sub-Saharan Africa (SSA) is among the regions in the world where the poverty rate is very high. Thus, majority of the people are not directly taxable and this could be responsible for the generally low domestic revenue mobilisation by governments in the region. With these peculiarities, mobilising revenue through indirect taxation might be considered as a more preferable option by governments. However, indirect taxes have their own shortcomings. They are regressive in nature and have tendencies to plunge more people below the poverty line and worsen the conditions of those that are already poor in the short run, via rise in commodity prices and fall in demand. Empirical studies on this subject that focused on SSA are largely country-specific. This study examines the effects of revenue mobilisation from indirect taxes on poverty based on panel data regression analysis covering the period from 1990 to 2020 for 29 selected SSA countries. The resulting panel regression estimates from the random effects model (REM) reveal that GDP per capita has negative and significant impacts on poverty in SSA in all estimated models. The impacts of customs and import duties, and domestic goods and services taxes were negative but significant in only one of the six models. The finding of this study suggests that customs and import duties, and domestic goods and services taxes could be used as good fiscal policy tools by which governments in SSA to raise revenue without necessarily worsening the poverty situation.