The Impact Of Regressive Taxes On Poverty, The Case Of Ghana

All over the world, governments collect taxes from the citizens which are the major source of revenue to develop the country through the provision of social amenities such as good roads, hospitals, schools etc. however, if the application of the taxes are not scientifically modeled and progressively applied, it can in itself become inimical to the socio-economic drive of the marginalized majority in the country.

Globally, studies conducted have revealed that fiscal systems have heavily impacted negatively on the poor who are in the majority whiles the minority rich have rather gained from regressive tax systems which is applied extensively by many countries.

The World Bank in 2017 looked at the revenue and spending of governments across eight low and middle income countries (Armenia, Ethiopia, Georgia, Indonesia, Jordan, Russia, South Africa and Sri Lanka), and it reveals that fiscal systems, while nearly always reducing inequality, can often worsen poverty.

The report said, while the cash portion of the net fiscal system had a positive impact on reducing inequality, the same cannot be said for poverty. The results indicate that the poor in Armenia and Ethiopia, and the moderate poor in Sri Lanka are net payers into the fiscal system. This is because of high consumption taxes on basic goods in these countries. When they include the whole sample of 30 countries, the results indicate that the poor in Armenia, Ethiopia, Ghana, Guatemala, Nicaragua, Tanzania, and Uganda, and the moderate poor in Bolivia, El Salvador, Dominican Republic, Honduras, Peru, and Sri Lanka are net payers into the fiscal system.

Moreover, the Ghana Poverty and Inequality Report released by UNICEF in 2016 also revealed that, although Ghana’s economic growth average about 7% since 2005 the inequality and poverty gaps between the poorest 10% and the richest 10% of the population has been on the rise and has also increased since 2006. The wealthiest now consume 6.8 times the amount than the poorest 10%, up from 6.4 times in 2006.

The report further revealed that average consumption of this wealthiest group increased by 27% between 2006 and 2013, whereas for the poorest it only increased by 19% meaning that growth for the richest group was over 1.4 times greater than for the poorest in this period. Equally, they found that the shares of total national consumption vary substantially between the rich and poor. The wealthiest 10% consume around one third of all national consumption, whereas the poorest 10% consume just 1.72%. This means that even if the Gini coefficient (Measure of the deviation of the distribution of income among individuals or households within a country from a perfectly equal distribution) has not notably increased since 2006, other evidence suggests that inequality between the poorest and wealthiest has indeed increased.

On the strength of the above, let’s consider only two variables for want of space in the context of Ghana as our case study.

In Ghana, there are three major ways of transportation which are; road, rail and air. By far, the road sub-sector of Ghana’s transportation system account for over 85% followed by air and rail transport accounting for 13% and 2% respectively. It is also important to note that road transport afford the poor in the society the cheapest way of transportation by reason of non-existence of rail transport.

Ironically, the government of Ghana decided to reduce the domestic airline tickets, patronized by the minority rich or the well-off in society by 17.5% while’s petroleum prices heavily patronized by the poor by way of transportation fares has increased over the same period by some 11%. The net effect is that, this simple unscientific and regressive tax application has resulted in deepening the woes of the poor whiles enriching the wealthy.

Additionally, the sales tax of 15 percent applied across board on basic food products is highly regressive to the extent that, it further impoverishes the poor because comparatively, the poor pay more tax on basic items such as food than the rich relative to their annual income.

For example, if a person earns a monthly income of ₵500 cedis and purchases an item with given a VAT amounting to 2 cedis, the person is actually charged 0.4% on his salary of 500.00, however another person earning ₵5,000.00 who buys the same product is charged only 0.04% on his income. Meaning, the lower the income, the higher the percentage charged relative to a higher income earner with regards sales tax or VAT. This converse relationship in tax application is disastrous to any forward looking nation.

These calls for a more superior, progressive and holistic tax policy that reduces inequality, joblessness and poverty and by extension armed robbery. It must be noted to our policy makers that inequality and poverty occasioned by regressive tax system and corruption is the breeding grounds for insecurity and armed robbery.

In conclusion, the Ghana Revenue Authority should take pragmatic steps to ensure that the over 4 million businesses and citizens accounting to over 85% operating in the informal sector be roped into the tax net. It is worthy of note that should the over 4 million entities are roped in, GRA will realize about 24 billion cedis instead of the ¢13.2 billion realized under the direct tax component in the year 2017. The end effect of this measure could lead to the scraping of regressive taxes which will in effect alleviate the suffering on the poor who are in the majority.

By: Bishop Nathaniel Rudolph
College of Bishops & Deans