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A Fiscal Incidence Analysis for Ethiopia

Ruth Hill, Gabriela Inchauste (), Nora Lustig (), Eyasu Tsehaye and Tassew Woldehanna
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Eyasu Tsehaye: Poverty & Equity Global Practice at the World Bank
Tassew Woldehanna: Addis Ababa University

No 41, Commitment to Equity (CEQ) Working Paper Series from Tulane University, Department of Economics

Abstract: This paper uses the 2010/11 Household Consumption Expenditure Survey (HCES) and the Welfare Monitoring Survey (WMS) collected by the Central Statistical Agency (CSA) of Ethiopia, as well as 2011 data from national income and public finance accounts from the Ministry of Finance and Development to assess the effects of government taxes, transfers and social spending on the distribution of income in Ethiopia, and examines whether policy can be modified to improve the well-being of the poor. This study finds that fiscal policy in Ethiopia is progressive and equalizing, and poor populations are net beneficiaries of the fiscal system. Though the depth and severity of poverty is ameliorated, the poverty headcount is higher after taxes, transfers, and subsidies. Though Ethiopia’s Gini coefficient was lowered by 2 points, the poverty headcount (under $1.25 USD per day in 2005 PPP) is increased from 31.9% to 32.4% as a result of fiscal policy. Direct taxes, such as PIT, were progressive and equalizing, but aggregately poverty-increasing due to a low cutoff income for PIT and a regressive land use fee. Direct transfers, especially the Productive Safety Net Program (PSNP), were progressive, equalizing, and poverty-reducing. Indirect taxes were progressive and equalizing, but poverty-increasing. Subsidies for goods like kerosene were relatively equalizing, while electricity subsidies were regressive because poor households often do not use electricity. Expenditures on primary education and health were progressive and equalizing, but spending on tertiary education was not. Due to low completion rates of primary education amongst the poor, access to tertiary education by the poor is almost nil.

Keywords: fiscal incidence; taxation; social spending; inequality; poverty; Ethiopia (search for similar items in EconPapers)
JEL-codes: H22 D31 I38 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dev
Date: 2017-04
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Published in Commitment to Equity, April 2017, pages 1-41

Downloads: (external link) First version, 2017 (application/pdf)

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