Remittances and the Redistributive Tax Policy in Ghana: A Computable General Equilibrium Approach

This paper numerically explores the distributive tax policy for improving both efficiency and equity with increased remittances in Ghana within a computable general equilibrium (CGE) framework. The generalized framework with the latest Ghanaian input-output table of year 2005 with 59 different production sectors provides the following results: First, the government can improve both efficiency and equity by using a government surplus generated by increased remittances without additional tax revenue. Second, if the government is concerned about equity, then a surplus used for more direct transfers to the rural households results in the best outcome in terms of equity. Third, such a policy also results in the improvement in efficiency. Welfare of not only rural but also urban households improves by such a policy through its strong stimulation effect on the demand side. Fourth, while the impact through the supply side is relatively smaller, an introduction of subsidies to production of the 'Cocoa Beans' sector results in the best outcome for the improvement in efficiency and equity among all supply side tax policies. Fifth, if the government is concerned only about efficiency, then a policy to use a surplus for more government spending on education or health achieves the highest efficiency through its direct demand effect. Under such a policy, the positive impact on equity is limited. Finally, while the Ghanaian economy can enjoy the largest benefits in improved efficiency as a whole when a surplus is used for more government spending on education or health, increased efficiency gain will be more distributed to the government sector in comparison with the case when a surplus is used for more direct transfers to the rural households.