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Working Paper

ICTD Working Paper 61

Linking Taxation and Social Protection: Evidence on Redistribution and Poverty Reduction in Ethiopia

Published on 1 December 2016

The reduction of poverty, and more recently inequality, are pressing concerns in many low- and middle-income countries, not in the least as a result of the Sustainable Development Goals committing countries to significant improvements by 2030. Redistribution is important for reaching these goals, and is shaped by countries’ tax and welfare systems. Despite redistribution resulting from the simultaneous effect of revenue collection and public expenditures, policies and analyses of their distributional effects have largely been undertaken from narrow and singular perspectives.

In this paper, we aim to jointly assess the distributional effect of taxes and transfers (through social protection) using Ethiopia as a case study. We find that currently Ethiopia’s flagship social protection programme is more effective than income taxation in achieving poverty reduction, while neither policy achieves a sizeable reduction in overall inequality.

Overall, our findings provide support for the common belief that social spending is more suitable than taxation to achieve redistribution. We also assessed whether Ethiopia would have the capacity to achieve the desired level of redistribution by applying higher marginal rates on relatively high incomes. Our results suggest that Ethiopia does not currently have the capacity to close the poverty gap, or to fully fund its main safety net programme using domestic income sources alone.

Authors

Image of Giulia Mascagni

Giulia Mascagni

IDS Research Fellow and ICTD Research Director

Image of Keetie Roelen

Keetie Roelen

Research Fellow / Co-Director, Centre for Social Protection

Publication details

authors
Hirvonen, K., Mascagni, G. and Roelen, K.
journal
ICTD Working Paper, volume 61
language
English

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About this publication

Region
Ethiopia

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