Taxing the world’s poor to give to the bureaucrat

The 10 percent of the world’s population still consuming $1.90 or less a day are subsisting on a small fraction of the resources available to people at the US poverty line.

In the rich world, even in the United States, government tax and transfer systems like welfare payments reduce the gap between rich and poor. But in the world’s poorest countries, taxes are less progressive, financial transfers are much smaller, and—with the bulk of social spending soaked up by broken health and education systems—the net effect is often to leave people poorer than they started.

Tax regime in many developing countries isn’t very progressive—taxing the rich a similar percentage of their income as the poor. That’s because the revenue authorities tend to rely on indirect taxes like VAT—which fall on all consumers—rather than direct taxes on high personal or corporate incomes. So poor people lose a similar proportion of their income to the government as do rich people. The impact of government can thus be to increase poverty rates.

In four of the five sub-Saharan African countries where CEQ data is available, the net effect of taxes and transfers is to increase the number of people living below the World Bank’s extreme poverty line. (In Tanzania, for example, poverty is nearly 20 percent higher due to taxes and transfers.)

Eradicating global poverty will require decades of sustained economic growth, and a state capable of delivering high-quality education and health services to all. But in the short term, just making the current system of taxes and transfers slightly more progressive would be—on a technical level—a pretty easy fix for poverty and inequality in many countries.

[Center for Global Development]

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