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A Fiscal Incidence Analysis for Ethiopia

Author

Listed:
  • Ruth Hill

    (Poverty & Equity Global Practice at the World Bank.)

  • Gabriela Inchauste

    (Poverty & Equity Global Practice at the World Bank)

  • Nora Lustig

    (Stone Center for Latin American Studies, Department of Economics, Tulane University, Commitment to Equity Institute (CEQI).)

  • Eyasu Tsehaye

    (Poverty & Equity Global Practice at the World Bank)

  • Tassew Woldehanna

    (Addis Ababa University)

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.

Suggested Citation

  • Ruth Hill & Gabriela Inchauste & Nora Lustig & Eyasu Tsehaye & Tassew Woldehanna, 2017. "A Fiscal Incidence Analysis for Ethiopia," Commitment to Equity (CEQ) Working Paper Series 41, Tulane University, Department of Economics.
  • Handle: RePEc:tul:ceqwps:41
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    File URL: http://repec.tulane.edu/RePEc/ceq/ceq41.pdf
    File Function: First version, 2017
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    More about this item

    Keywords

    fiscal incidence; taxation; social spending; inequality; poverty; Ethiopia;

    JEL classification:

    • H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • I38 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - Government Programs; Provision and Effects of Welfare Programs

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