Vo o, Tewa Papy; Ngepah, Nicholas
A icle
Pe sis en income inequali y in Sub-Saha an A ica: The
ole o ins i u ion index and e ec i e VAT
Economies
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MDPI – Mul idisciplina y Digi al Publishing Ins i u e, Basel
Sugges ed Ci a ion: Vo o, Tewa Papy; Ngepah, Nicholas (2025) : Pe sis en income inequali y in Sub-
Saha an A ica: The ole o ins i u ion index and e ec i e VAT, Economies, ISSN 2227-7099, MDPI,
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Ci a ion: Vo o, T. P., & Ngepah, N.
(2025). Pe sis en Income Inequali y in
Sub-Saha an A ica: The Role o
Ins i u ion Index and E ec i e VAT.
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A icle
Pe sis en Income Inequali y in Sub-Saha an A ica: The Role o
Ins i u ion Index and E ec i e VAT
Tewa Papy Vo o 1,* and Nicholas Ngepah 2
1Auckland Pa k Kingsway Campus, Uni e si y o Johannesbu g, Johannesbu g 2006, Sou h A ica
2Depa men o Economic and Econome ics, College o Business and Economics,
Johannesbu g 2006, Sou h A ica; [email p o ec ed]
*Co espondence: [email p o ec ed]
Abs ac : As coun ies wo ldwide endea o o ul ill he Uni ed Na ions Sus ainable
De elopmen Goal (SDG) 10, which emphasizes educing inequali y, he e is a g owing
impe a i e o u ilize ax policy and ins i u ions o accomplish his objec i e. Hence, his
s udy is inspi ed by his a ionale. The aim o his s udy is o assess he ela ionship be ween
e ec i e VAT (calcula ed as o al VAT e enues di ided by inal consump ion, which
e lec s he economic incidence o he ax a he han i s legal de ini ion), ins i u ion index,
and income inequali y. To achie e his objec i e, his s udy uses he sys em gene alized
me hod o momen s (SGMM) o 35 Sub Saha an A ica coun ies om 1995 o 2021. The
esul s show ha e ec i e VAT inc eases income inequali y in bo h he sho and long un.
Howe e , he e ec o he long un is g ea e han ha o he sho un. Fu he mo e, he
esul s e eal ha ins i u ional quali y ein o ced he posi i e e ec o e ec i e alue added
ax on income inequali y in bo h he sho and long un, wi h he long un being mo e
p onounced han he sho un. This sugges s ha e ec i e VAT policies and ins i u ional
quali y applied in his s udy augmen income inequali y. Addi ionally, i is also no iced
ha e hnic agmen a ion impedes e ec i e VAT o lowe income dispa i y in he sho
and long un in SSA. Hence, a ele an policy o s eng hen he ax sys em and imp o e
ins i u ional quali y should be gi en p io i y in SSA.
Keywo ds: e ec i e VAT; income inequali y; ins i u ional quali y; SGMM
JEL Classi ica ion: H20; O11; O15
1. In oduc ion
Policymake s and esea che s a e inc easingly conce ned abou he apid ise o global
inequali y and i s subs an ial e ec s on mac oeconomic s abili y and g ow h. The inc eas-
ing numbe o poo people wo ldwide has p omp ed calls o mo e equi able esou ce
dis ibu ion (A emo & Abiodun,2020). This g owing income inequali y unde sco es he
impo ance o iscal policy in na owing he income gap be ween lowe and highe -income
indi iduals (Fe nandes e al.,2019). Fiscal policy, h ough axa ion and public spending,
can di ec ly a ec income gaps ia mone a y paymen s o indi ec ly by p o iding ee
se ices like educa ion and heal hca e, he eby enhancing ins i u ional quali y. In A ica,
economic g ow h is expec ed o imp o e li ing s anda ds (Rod ik,2014). Howe e , his
equi es signi ican in es men in educa ion, heal hca e, and public u ili ies, which many
SSA go e nmen s canno a o d due o igh budge s. The ax a io in mos A ican coun-
ies is 15% o lowe , insu icien o unding economic and human de elopmen . While
in e na ional inancial aid could suppo public in es men , i is limi ed due o ecessions in
Economies 2025,13, 81 h ps://doi.o g/10.3390/economies13030081
Economies 2025,13, 81 2 o 22
weal hy coun ies, highligh ing he need o be e local ax e enue collec ion o imp o e
ins i u ional quali y and educe inequali y.
The VAT is one o he mos signi ican de elopmen s in ax sys ems since he in o-
duc ion o pe sonal income ax in bo h de eloping and de eloped economies. I accoun s
o a la ge po ion o ax e enue in many de eloping na ions and plays a c ucial ole in
p omo ing ax ansi ion (Adandohoin,2021). Ad an ages o VAT include p e en ing he
cascading o indi ec axes, being ha de o e ade, and ease o implemen a ion o in e na-
ional ade. VAT is also conside ed a “Money Machine” o gene a ing mo e e enue (Keen
& Lockwood,2010). Howe e , i s app op ia eness o de eloping economies is deba ed.
Em an and S igli z (2005) a gue ha VAT can be p oblema ic in economies wi h la ge
in o mal sec o s, while Keen (2008) con ends ha VAT indi ec ly axes he in o mal sec o
by being le ied on inpu s and impo s. Some schola s, including Gemmell and Mo issey
(2005) and Bi d and Zol (2005), sugges ha he bo de axes eplaced by VAT may ha e
been less eg essi e. The eg essi i y o indi ec axes like VAT is conside ed a ac o in
he ising income gap in many coun ies, as hey disp opo iona ely a ec lowe -income
indi iduals who pay a la ge po ion o hei income on hese axes (Kozuha o e al.,
2015). Indi ec axes impac e e yone ega dless o income, o en widening he income gap
u he , especially o hose wi h lowe incomes who spend a la ge pe cen age o hei
income on VAT.
The seminal wo k o Mel ze and Richa d (1981) shows ha democ a iza ion, by
enla ging poli ical powe o poo households, will augmen he endency o p o-poo
policy, na u ally linked wi h edis ibu ion and hence lowe income dispa i y. This is
consis en wi h Acemoglu e al. (2013), who use OLS and GMM and ound ha he e ec
o iscal edis ibu ion on inequali y depends on he democ acy channel. Recen ly, Messy
and Ndjokou (2021) assessed which ax a iable among ax s uc u es (di ec o indi ec
axes) and he weigh o ax e enue lowe inequali y in SSA using Fixed E ec O dina y
Leas Squa es. By in e ac ing wi h ax e enue and co up ion, hei esul s e eal ha ax
e enue signi ican ly lowe s inequali y in an economy wi h a low le el o co up ion.
Con a y o he abo e au ho s, his s udy examines he combined e ec o EVAT and
ins i u ion quali y on income inequali y in SSA. o se e al easons: (i) We use EVAT as
one o he main ax ins umen s con ibu o o he o al ax e enue in SSA hough he
o al ax e enue in SSA is lowe han o he s egions. (ii) The SSA egion is cha ac e ized
by a highe le el o income inequali y and weak ins i u ions compa ed o o he egions.
Sub-Saha an A ica (SSA) aces signi ican challenges wi h income inequali y, as e idenced
by i s high Gini coe icien s, wi h six o he en mos unequal coun ies globally loca ed in
he egion (Wo ld Inequali y Da abase,2023). Despi e he po en ial o VAT as a ool o
gene a ing go e nmen e enue, SSA s uggles wi h low ax compliance, pa icula ly in
he in o mal sec o , which exace ba es inequali y. Recen da a shows ha he iches 10%
con ol a disp opo iona e sha e o income, con ibu ing o pe sis en inequali y (A ican
De elopmen Bank,2010). The e ec i eness o VAT in SSA is u he hinde ed by high le els
o in o mali y and weak en o cemen , which limi s i s edis ibu i e po en ial. Mo eo e ,
compa ed o o he egions like La in Ame ica, SSA’s ax sys em has made limi ed p og ess
in educing inequali y, sugges ing he need o mo e a ge ed e o ms in axa ion and
public expendi u e o add ess hese s uc u al issues (Wo ld Bank,2020). The ins i u ional
quali y index, which includes con ol o co up ion, poli ical s abili y and absence o
iolence/ e o ism, go e nmen e ec i eness, egula o y quali y, ule o law, and oice
and accoun abili y, is c ucial o he success ul implemen a ion and impac o VAT policies.
Robus ins i u ions can enhance ax compliance, educe co up ion, and ensu e e icien
public esou ce alloca ion, he eby dec easing income inequali y (Kau mann e al.,2009).
Con e sely, weak ins i u ions can lead o ax e asion, co up ion, and ine icien public
Economies 2025,13, 81 3 o 22
spending, exace ba ing economic dispa i ies (Gup a e al.,2002). The e o e, unde s anding
he ela ionship be ween e ec i e VAT implemen a ion and high ins i u ional quali y is
essen ial o designing policies ha encou age inclusi e g ow h and economic equi y in
Sub-Saha an A ica.
The Equi y-E iciency T ade-o Theo y sugges s a balance be ween economic e i-
ciency and equi y, wi h VAT being e icien due o i s b oad ax base and low e asion
a es, ye po en ially eg essi e by disp opo iona ely impac ing lowe -income households.
Ins i u ional quali y plays a i al ole in managing his ade-o ; high-quali y ins i u ions
can design complemen a y policies, like a ge ed ans e s o p og essi e subsidies, o
mi iga e VAT’s eg essi e e ec s and enhance equi y (Tanzi & Zee,2000). Acemoglu’s
esea ch unde sco es he impo ance o ins i u ions, de ined as he ules and no ms go e n-
ing economic, poli ical, and social in e ac ions, as undamen al o economic pe o mance
and income dis ibu ion. He di e en ia es be ween Inclusi e Ins i u ions, which p omo e
economic pa icipa ion, en o ce p ope y igh s, and p o ide public goods equi ably, hus
suppo ing economic g ow h and equi able esou ce dis ibu ion (Acemoglu & Robinson,
2012), and ex ac i e ins i u ions, which concen a e powe and weal h among a ew, es ic
economic oppo uni ies o he majo i y and a e o en ma ked by co up ion and weak ule
o law, leading o economic s agna ion and high-income inequali y. In his con ex , inancial
de elopmen plays a c ucial ole in shaping income inequali y. As inancial sys ems expand,
hey can ei he educe inequali y by b oadening access o inancial se ices o inc ease
dispa i ies by a o ing weal hie indi iduals, as emphasized by Chle sos and Sin os (2023)
and De Haan and S u m (2017). Addi ionally, ins i u ional quali y signi ican ly in luences
inequali y, as s ong ins i u ions can p omo e equi able economic g ow h, while weak
ins i u ions may ein o ce exis ing dispa i ies (No h,1990).
The e o e, his s udy empi ically in es iga es he e ec o EVAT and ins i u ion quali y
on income inequali y om 1995 o 2021. In so doing, ou pape answe s wo ques ions:
(i) Does VAT impac income inequali y, i yes, is he impac simila in he sho and long
un? (ii) Is he impac o VAT on income inequali y condi ional on ins i u ion quali y? In
answe ing he abo e ques ions, we con ibu e by expanding he li e a u e on VAT and
income inequali y in a ious ways: (i) While mos schola s assess VAT ( ocusing on i s
legal de ini ion)–income inequali y nexus and he ins i u ion quali y-income inequali y
associa ion, his s udy empi ically con ibu es o he p e ious s udies by examining he
join impac o e ec i e VAT (calcula ed as o al VAT e enues di ided by inal consump-
ion, which e lec s he economic incidence o he ax a he han i s legal de ini ion) and
ins i u ion quali y on income inequali y in bo h sho and long un in SSA. Thus, he
esul s om his s udy a e expec ed o be obus and consis en gi en ha i will help he
policymake s in he ealloca ion o esou ces and may p oduce signi ican policy ecom-
menda ions. (ii) We employ he Two-S ep SGMM es ima ion me hod, in eg a ing o wa d
o hogonal de ia ions, se ing i apa om he adi ional SGMM app oach ha does
no accoun o hese de ia ions (Roodman,2009). This imp o es he eliabili y and e i-
ciency o pa ame e es ima es, especially in he p esence o small samples, missing da a,
and po en ial endogenei y issues. This makes i a obus choice o dynamic panel da a
analysis. (iii) Resea ch indica es e hnic agmen a ion a ec s income dispa i y (Chadha
& Nandwani,2018). Fu he mo e, Cogneau and Dup az (2015) asse ha unde s anding
he de elopmen dispa i ies in SSA equi es an examina ion o hei cul u al and social
speci ici ies. Hence, i is impo an o assess he e ec o e ec i e VAT on income dispa i y
ocusing on e hnic agmen a ion. I is no ed ha he e ec s o a iables like gende and
e hnic agmen a ion canno be di ec ly es ima ed because hese a iables emain cons an
o e ime. To add ess his, his s udy u ilizes he ime-in a ian eg esso s de eloped by
K ip ganz and Schwa z (2019) in dynamic panel da a analysis, speci ically adap ed o assess
Economies 2025,13, 81 4 o 22
“ ime-in a ian ” a iables such as e hnic agmen a ion. T adi ional es ima ion me hods
all sho due o hei inabili y o accu a ely cap u e he ue e ec s o “ ime-in a ian ”
a iables, he bias a ising om he co ela ion be ween explana o y a iables and uni
e ec s in andom-e ec s models, and he challenge o sepa a ing he e ec s o obse ed
he e ogenei y om ime-in a ian uni he e ogenei y in ixed-e ec s models. Howe e ,
hese challenges a e e ec i ely add essed by employing he eg esso s o K ip ganz and
Schwa z, which a e ailo ed o e alua e “ ime-in a ian ” a iables.
Following a e he emaining sec ions: In Sec ion 2, he ele an li e a u e is co e ed.
The da a and econome ic model a e co e ed in Sec ion 3. The indings a e p esen ed in
Sec ion 4, and he conclusion and policy ecommenda ions a e p esen ed in Sec ion 5.
2. Mo i a ion and Li e a u e Re iew
Income dispa i y emains a signi ican issue in SSA, impeding economic de elopmen
and social s abili y. Unde s anding how VAT and ins i u ional quali y oge he in luence
income inequali y is essen ial o c a ing e ec i e policy in e en ions. This li e a u e
e iew syn hesizes exis ing esea ch on VAT, ins i u ional quali y, and income inequali y,
highligh ing hei in e ac ions and iden i ying gaps in cu en knowledge. Musg a e
(1959) emphasized ha axa ion is c ucial o income edis ibu ion, public goods p o ision,
and go e nmen accoun abili y. Al hough educing eliance on na u al esou ces and
o eign aid is desi able, mos SSA coun ies ace challenges wi h esou ce mobiliza ion. Tax
mobiliza ion in A ica is low compa ed o o he egions, wi h SSA economies collec ing
only 14% o GDP in axes in 2018 (UNU-WIDER,2021). VAT, which accoun s o abou 40%
o o al ax e enue in A ican coun ies (Kagan,2019), o e s ewe e asion oppo uni ies
as buye s aim o maximize paymen s and selle s minimize eceip s (Slem od & Velayudhan,
2022). VAT is based on consump ion a he han income, applying he same a e o all
pu chases (Kagan,2019).
Also, The s uc u e and e iciency o he edis ibu ion sys em a e c ucial in analyzing
he impac o VAT on income inequali y. While VAT is gene ally eg essi e, i s s uc u e
can a y signi ican ly based on he goods and se ices axed, he a es applied, and who
bea s he bu den.
S uc u e o VAT:
1.
Goods and Se ices Taxed: VAT can be applied o a wide ange o goods, bu some
essen ials like ood, heal hca e, and educa ion may be exemp o axed a lowe a es
o educe he eg essi e impac . Luxu y goods may be axed a highe a es, shi ing
he bu den away om lowe -income g oups.
2.
Ra es: S anda d and di e en ial VAT a es a ec who bea s he ax bu den. A single
uni o m a e bu dens lowe -income households mo e, as hey spend a la ge sha e o
hei income on axed goods.
3.
Who is A ec ed: In economies wi h a la ge g ay economy, VAT en o cemen is weak.
Weal hy indi iduals and co po a ions may e ade axes, while poo e consume s
who ely on in o mal ma ke s bea he b un , limi ing he e ec i eness o VAT as a
edis ibu i e ool.
E iciency o Redis ibu ion: The e iciency o he edis ibu ion sys em depends on
how VAT e enues a e used. I alloca ed o public se ices like heal hca e and educa ion,
VAT can mi iga e i s eg essi e na u e. Howe e , i public unds a e mismanaged o i he
ax sys em is no p og essi e, he impac on educing inequali y emains limi ed.
2.1. VAT and Income Inequali y
VAT is a widely implemen ed consump ion ax ha signi ican ly boos s go e nmen
e enue in many SSA coun ies. Howe e , i s impac on income inequali y is con en ious.
Economies 2025,13, 81 5 o 22
C i ics claim VAT is eg essi e because lowe -income households spend a la ge po ion o
hei income on consump ion, hus bea ing a highe ela i e ax bu den (Bi d & Gend on,
2007). This eg essi e e ec can exace ba e income inequali y i no o se by complemen a y
policies. On he o he hand, VAT’s e iciency in gene a ing e enue can p o ide subs an ial
unds o public se ices and edis ibu i e p og ams. When e ec i ely managed, hese
e enues can suppo social sa e y ne s, heal hca e, and educa ion, which can help educe
income inequali y (IMF,2015). The e o e, he o e all impac o VAT on inequali y la gely
hinges on how he gene a ed e enue is managed and edis ibu ed.
2.2. Ins i u ional Quali y and Income Inequali y
Ins i u ional quali y, which includes go e nance, legal in eg i y, and bu eauc a ic
e iciency, is essen ial in shaping economic ou comes like income dis ibu ion. High-quali y
ins i u ions a e associa ed wi h be e economic pe o mance and a ai e dis ibu ion
o esou ces (Kau mann e al.,2009). These ins i u ions ensu e e ec i e ax collec ion,
educe co up ion and ensu e ha ax e enues a e used e icien ly o public goods and
se ices ha bene i he b oade popula ion (Gup a e al.,2002). On he o he hand, weak
ins i u ions cha ac e ized by co up ion, ine iciency, and poo go e nance can unde mine
he bene i s o ax policies like VAT. In such se ings, ax e enues may be misapp op ia ed,
dec easing he unds a ailable o edis ibu i e p og ams and wo sening income inequali y
(Acemoglu e al.,2001). Chle sos and Sin os (2023) a gue ha inancial de elopmen can
educe inequali y by p o iding g ea e access o c edi and in es men oppo uni ies,
especially o ma ginalized g oups. Con e sely, De Haan and S u m (2017) sugges ha in
de eloping economies, he inancial sec o may exace ba e inequali y i i s g ow h p ima ily
bene i s he a luen , limi ing i s b oade impac . Fu he mo e, he ole o ins i u ional
quali y is i al, as e ec i e ins i u ions can ensu e ha inancial de elopmen leads o mo e
inclusi e economic ou comes, while poo ins i u ions may allow he bene i s o inancial
g ow h o be une enly dis ibu ed (Acemoglu & Robinson,2012).
2.3. Combined E ec s o VAT and Ins i u ional Quali y
The in e ac ion be ween Value-Added Tax (VAT) and he quali y o ins i u ions is
c ucial in de e mining hei combined e ec on income inequali y. High-quali y ins i-
u ions can enhance he e icacy o VAT by ensu ing ax compliance, educing e asion,
and di ec ing e enues owa ds ai and inclusi e de elopmen ini ia i es (Moo e,2007).
Fu he mo e, e ec i e ins i u ions can implemen addi ional measu es such as p og essi e
income axes o a ge ed subsidies o alle ia e VAT’s eg essi e impac and p o ec lowe -
income households (Tanzi & Zee,2000). Howe e , in en i onmen s wi h weak ins i u ions,
e en well-designed VAT sys ems may s uggle o educe inequali y due o inadequa e
en o cemen , widesp ead e asion, and imp ope esou ce alloca ion. Co up ion and ine i-
ciency can di e VAT e enues away om public se ices, diminishing hei po en ial o
edis ibu e weal h and po en ially exace ba ing income gaps (Acemoglu & Robinson,2008).
Padhan e al. (2022) u ilized he nonlinea au o eg essi e dis ibu i e lag model (ARDL) o
analyze he in luence o ax a es and go e nmen spending on income inequali y. Thei
indings sugges ha highe ax a es p omo e income equali y, while go e nmen expen-
di u e diminishes inequali y. Malla and Pa h ana akul (2022) in es iga ed he impac o
ins i u ional capaci y on iscal policy’s e ec on income dis ibu ion using he sys em GMM
wi h da a spanning om 2000 o 2019. Thei esul s indica e ha a ge ed iscal spending
on heal h and educa ion educes inequali y in de eloped na ions. Addi ionally, al hough
he ela ionship be ween ins i u ional capaci y and iscal policy aligns wi h expec a ions,
hese co ela ions a e no s a is ically signi ican .
Economies 2025,13, 81 6 o 22
Empi ical s udies ca ied ou in SSA highligh he pi o al ole o ins i u ional quali y
in shaping he impac o VAT on income inequali y. Fo example, Keen and Lockwood
(2010) obse ed signi ican dispa i ies in bo h he e enue-gene a ing e iciency o VAT and
i s e ec s on inequali y ac oss coun ies, depending on he s eng h o hei ins i u ional
amewo ks. Na ions wi h mo e obus ins i u ions we e be e equipped o u ilize VAT
e enues e ec i ely o unding social p og ams, he eby alle ia ing inequali y. Acemoglu
and Robinson (2012) p esen his o ical and c oss-coun y e idence demons a ing ha
inclusi e ins i u ions, which p omo e widesp ead economic pa icipa ion and ai esou ce
alloca ion, a e c ucial o diminishing income inequali y. Thei esea ch indica es ha in
SSA, whe e ins i u ional quali y ends o be weake , enhancing go e nance and comba ing
co up ion a e i al s eps o enhancing he e ec i eness o VAT and o he ax policies in
ackling inequali y. Alemayehu (2010) conduc ed a gende ed iscal incidence analysis in
E hiopia, e ealing ha VAT exace ba es he income gap ega dless o gende , albei wi h a
mo e p onounced unequalizing e ec on men. This disc epancy may be a ibu ed o men’s
highe consump ion o hea ily axed i ems such as obacco and alcohol. Bi d and Zol
(2005) unde sco ed he eg essi e cha ac e is ics o VAT, which disp opo iona ely bu den
lowe -income households, o en encompassing ma ginalized e hnic g oups. Alesina and
Fe a a (2005) highligh ed he conside able e hnic di e si y wi hin Sub-Saha an A ica
(SSA), wi h an e hnic agmen a ion index o app oxima ely 65%, and o e 70% o SSA
na ions exhibi ing e hnically di e se popula ions. This e hnic he e ogenei y is equen ly
linked o heigh ened le els o mismanagemen and co up ion, as obse ed by Mau o
(1995), he eby unde mining he e icacy o VAT and pe pe ua ing income inequali y. The
collec i e indings sugges ha al hough VAT se es as an e icien e enue-gene a ing
mechanism, i s eg essi e na u e and he socio-economic landscape in SSA necessi a e
me iculous policy o mula ion o alle ia e i s impac on income inequali y.
This esea ch sugges s ha ins i u ional quali y mi iga es he a o able impac o VAT
on inequali y. Speci ically, when a coun y gene a es subs an ial ax e enue om a speci ic
iscal ool such as VAT, ins i u ional quali y becomes c ucial in add essing inequali y. The
collec i e in luence o VAT and ins i u ional quali y on income inequali y in SSA high-
ligh s he need o a comp ehensi e policy amewo k ha add esses bo h axa ion and
ins i u ional quali y. While VAT is indispensable o e enue gene a ion, i s eg essi e
na u e equi es ca e ul managemen o p e en widening income gaps. Simul aneously,
in es men s in ins i u ional quali y a e impe a i e o diminishing inequali y and os e ing
sus ainable economic g ow h. Policymake s in SSA mus in eg a e ax policies wi h s a e-
gies o enhance ins i u ional quali y, hus achie ing a mo e equi able income dis ibu ion
and p omo ing long- e m economic s abili y.
3. Econome ic Model and Da a
3.1. P incipal Componen Analysis (PCA)
This pape uses PCA o c ea e a composi e index o ins i u ional quali y (INST). To
cla i y he me hodology, a b ie explana ion o PCA is necessa y. PCA, i s in oduced
by Ka l Pea son in 1901 and u he de eloped by Ho elling in 1933, is a me hod used
o ex ac in o ma ion om high-dimensional da ase s. I ans o ms he da a in o new
indices ha encapsula e ele an in o ma ion ac oss dis inc , unco ela ed dimensions.
This echnique educes he numbe o a iables while e aining as much o iginal da a as
possible. In cons uc ing he composi e index o ins i u ional quali y (INST) a iables,
we u ilized he i s eigen ec o s (loading ma ix) om he PCA as he necessa y weigh s,
p oducing he ollowing linea combina ion:
INST =ß1CC +ß2PS_AV +ß3GE +ß4REG_QTY +ß5RL +ß6V_A(1)
Economies 2025,13, 81 7 o 22
whe e:
ß1
,
ß2
,
ß3
,
ß4
,
ß5and ß6
a e he eigen ec o s (weigh s) om he PCA and CC,
PS_AV, GE,
REG_QTY
, RL and V_A a e he six syn he ics o he ins i u ional quali y index.
3.2. A Dynamic Panel Da a Model
To analyze he associa ion be ween VAT, ins i u ional quali y, and inequali y; i s ,
we use he Dumi ecu and Hu lin causali y es o check he di ec ional causali y o he
a iables o in e es , and second, sys em GMM (Blundell & Bond,1998) is applied o
accoun o omi ed a iables, measu emen e o , and endogenei y.
The models a e speci ied as ollows:
Model 1-6 excludes he in e ac ion be ween EVAT and o he eg esso s o con ol
a iables:
lnGinii =β1lnGinii −1+β2lnEVATi, +β3INSTi, ´
+β4Xi, +θi+Ω +ϵi (2)
SGMM 7 includes he in e ac ion be ween EVAT and ins i u ional quali y:
lnGinii =β1lnGinii −1+β2lnEVATi, +β3INSTi, +β4EVATi,
∗INSTi, ´
+β5Xi, +θi+Ω +ϵi
(3)
SGMM 8 inco po a es he in e ac ion be ween EVAT and e hnic agmen a ion. We include
e hnic agmen a ion and i s in e ac ion wi h EVAT o check i hese a iables con ibu e o
he ela ionship be ween EVAT and highe and pe sis en inequali y in SSA:
lnGinii =β0+β1lnGinii −1+β2lnEVATi, +β4INSTi, +β4ETHi,
+β5EVATi, ∗ETHi, ´
+β6Xi, +θi+Ω +ϵi
(4)
whe e
Ginii
is income inequali y,
Ginii −1
is he dynamic cha ac e is ic o he equa ion,
EVATi,
is e ec i e alue added ax in GDP ( he loga i hm o eal pe capi a GDP; INST
ep esen s ins i u ional quali y and GDPpc deno es GDP pe capi a, X ep esen s he ec o
o con ol a iables such as GDPpc is GDP pe capi a, VAT, in la ion, co up ion, gende
equali y (GEN), e hnic agmen a ion (ETH), educa ional inequali y (EDINEQ).
EVATi, ∗
INSTi,
desc ibes he in e ac ion e m o EVAT wi h ins i u ional quali y. This shows
ha he impac s o VAT on inequali y a e condi ional on ins i u ional quali y.
´
θiand Ω
a e coun y-speci ic e ec and ime-speci ic e ec , espec i ely.
ϵi
is he e o e m and
β
is a ec o es ima ed coe icien s. The selec ed a iables in he model a e c ucial o
analyzing he ela ionship be ween VAT, ins i u ional quali y, and income inequali y. He e’s
a summa y o hei impo ance:
1.
The Gini coe icien : The Gini coe icien emains a s anda d measu e o income
inequali y, cap u ing dispa i ies in income dis ibu ion ac oss socie y. I is c i ical o
unde s anding income inequali y dynamics (OECD,2021).
2.
Lagged Income Inequali y: The inclusion o lagged income inequali y accoun s o
he pe sis ence o inequali y o e ime. P e ious income inequali y ends o shape
cu en inequali y, as social and economic s uc u es can lock in pa e ns o inequali y
(Lus ig,2020;Milano ic,2016).
3.
E ec i e VAT in GDP: The e ec i e VAT in GDP plays a di ec ole in public e enue
gene a ion, and he e ec i eness o VAT can in luence a coun y’s abili y o edis-
ibu e income (Baldwin,2020). E icien VAT en o cemen suppo s a go e nmen ’s
edis ibu i e capaci y, di ec ly impac ing income inequali y.
4.
Ins i u ional Quali y (INST): S ong ins i u ions a e essen ial o e ec i e go e -
nance, ensu ing ax compliance and equi able edis ibu i e policies. Recen s ud-
ies highligh ha ins i u ional quali y, including go e nmen e iciency and he
Economies 2025,13, 81 8 o 22
ule o law, is a key de e minan o income inequali y (Kau mann e al.,2020;
Acemoglu & Robinson,2019).
5.
GDP pe Capi a (GDPpc): Economic de elopmen , ep esen ed by GDP pe capi a,
is a c ucial de e minan o income inequali y. Highe GDP pe capi a is ypically
associa ed wi h g ea e esou ces o social edis ibu ion, educing income inequali y
(Chancel e al.,2021;Bou guignon,2020).
6.
Con ol Va iables: Addi ional ac o s like VAT design, in la ion, co up ion, gende
equali y, e hnic agmen a ion, and educa ional inequali y a ec bo h he e ec i eness
o edis ibu i e policies and income inequali y. Recen esea ch emphasizes ha
in la ion e odes eal income o poo e households (IMF,2021), while co up ion
unde mines ax sys ems (Jin & Lim,2020). Educa ional inequali y emains a key
ac o in pe sis en income inequali y (OECD,2020), and e hnic agmen a ion can
exace ba e inequali y by educing social cohesion (Alesina e al.,2020).
In his sec ion, a panel da ase o 35 coun ies
1
om 1995 o 2021 is assessed o examine
he impac o VAT on income dispa i y. We ake 3-yea a e ages o all ime- a iable in
o de o diminish sho - e m luc ua ions because o business cycles.
2
Addi ionally, ou
key a iables o in e es , such as inequali y, VAT, and GDP pe capi a a y slowly o e
ime. The ollowing model is es ima ed in his s udy using Blundell and Bond’s (1998)
me hodology: Since agg ega e a iables like inequali y ha e conside able ime pe sis ence,
we ha e included lagged inequali y as an explana o y a iable in Equa ions (2) and (3). In
ac , he se ial co ela ion o income inequali y o e he yea s is well es ablished (Ku osaki,
2011). This allows us o examine dynamic panel da a.
3
To compu e a long- un impac o an
inc ease in EVAT on he income gap, his s udy ollows Woold idge (2013, p. 635)
4
No e ha
he ollowing challenges need o be handled in o de o es ima e Equa ion (3). (i) he lag
eg essand, inco po a ed as a eg esso , is endogenous. (ii) As p e iously a gued, omi ed
a iable bias, e e se causali y, and measu emen e o s make i di icul o examine he
impac s o EVAT, ins i u ional quali y, and inequali y. We employ sys em GMM o add ess
he a o emen ioned issues e en hough we ake ad an age o he ac ha he indi idual
dimension in ou panel da a is bigge han he ime dimension.
Rega ding measu emen e o s, i is well known ha he a iables axa ion and in-
equali y a e co ela ed wi h measu emen e o s. The lack o a consensus measu e o hese
a iables in he li e a u e se es as e idence o his. Some key a iables may be le ou o
he model in e ms o omi ed a iables. Despi e he ac ha a numbe o de e minan s
o income inequali y a e impo an , hese a iables a e no included because hey may
be associa ed wi h o he ac o s in he model. Finally, he e e se causali y issue may be
demons a ed by he ac ha , al hough VAT in luences inequali y, e e se causa ion is also
possible due o he ac ha an inc eased VAT can lead o a highe le el o income inequali y.
The inclusion o he lagged a iable o income dispa i y in he model, howe e , makes i
e en mo e c ucial o ake in o accoun i s memo y impac because income inequali y is a
pa h-dependen p ocess ha depends on i s p io de elopmen (Teng,2019). Due o all o
he a o emen ioned ac o s, SGMM is he es ima ion me hod ha bes i s ou s udy. The
sys em GMM es ima o is p e e able because, as was said ea lie , ou eg essand is ime pe -
sis en . Addi ionally, using a sui able endogenous a iable (EVAT) as a eliable ins umen
can add ess he po en ial endogenei y o ou a iables. The mode a ing e ec o e hnic
agmen a ion on he ela ionship be ween EVAT and income dispa i y is examined using
he dynamic panel es ima o o ime-in a ian a iables by K ip ganz and Schwa z (2019).
This me hod is pa icula ly sui able because i p o ides obus ness agains speci ica ion
e o s a ising om he exogenei y assump ion. Addi ionally, i allows o cap u ing he
ue e ec o ime-in a ian a iables, which is ypically o e looked by o he me hods. A
signi ican ad an age o he wo-s ep app oach is ha i enables he co ec ion o es ima es
Economies 2025,13, 81 15 o 22
inc ease in inequali y in he sho un. Howe e , he long- e m esul indica es ha a 1%
inc ease in he in e ac ion be ween he wo a iables will esul in a 1.416 uni s inc ease
in inequali y.
4.4. Discussion
We now ocus on he ela ionship be ween he e ec i e VAT (EVAT), ins i u ional
quali y, inequali y, and o he a iables, along wi h hei implica ions. The e ec i e VAT is
calcula ed as o al VAT e enues di ided by inal consump ion, e lec ing he economic
incidence o he ax a he han i s legal de ini ion. I is assumed ha he ax bu den is
ans e ed o end consume s, making inal consump ion an app op ia e ax base. Table 4
p esen s he SGMM es ima es o e ec i e VAT, ins i u ional quali y, inequali y, and o he
con ol a iables.
In Sub-Saha an A ica (SSA), an e ec i e VAT exace ba es income inequali y in bo h
he sho and long e m, wi h a mo e p onounced e ec o e ime. Ini ially, VAT’s eg essi e
na u e inc eases he cos o goods and se ices, disp opo iona ely a ec ing low-income
households and causing a no iceable bu limi ed ise in income inequali y (Wo ld Bank,
2020). O e ime, his e ec in ensi ies as he cos o li ing con inues o ise, u he s aining
low-income households and widening he income gap, while weal hie households mo e
easily abso b hese cos s (OECD,2020). This long- e m impac is wo sened by weak
go e nance and ine icien public spending, hinde ing he e ec i e use o VAT e enue o
social p og ams (T anspa ency In e na ional,2021). These indings suppo he Reg essi e
Theo y o VAT in SSA. To add ess hese issues, policymake s should conside a ge ed
VAT exemp ions o necessi ies, s eng hen social p o ec ion p og ams, and implemen
comp ehensi e ax e o ms o inc ease eliance on p og essi e axes (UNICEF,2020;A ican
De elopmen Bank,2019). Compa a i e s udies om La in Ame ica emphasize he need
o obus edis ibu i e policies o coun e ac VAT’s eg essi e impac s (Bi d & Zol ,2005;
ECLAC,2018). Add essing VAT’s long- e m impac on inequali y is c ucial o economic
s abili y and g ow h, as high inequali y can lead o social un es and educed consume
spending (UNCTAD,2019).
The indings show ha ins i u ional quali y exace ba es inequali y bo h in he sho
and long e m in Sub-Saha an A ica ep esen ing a signi ican depa u e om con en ional
expec a ions, necessi a ing a nuanced in e p e a ion. One plausible explana ion could be
ha while obus ins i u ions may con ibu e o o e all economic p og ess, weak ins i u-
ions like SSA may disp opo iona ely a o speci ic socie al segmen s, he eby exace ba ing
income dispa i ies. Fo example, ins i u ions migh unin en ionally p o ide p e e en ial
ea men o ce ain g oups, such as he a luen o poli ically in luen ial, esul ing in
heigh ened le els o inequali y (Acemoglu & Robinson,2012). The obse ed long- e m
impac o ins i u ional quali y on inequali y being g ea e han i s sho - e m e ec sugges s
complex unde lying mechanisms a play. One possible explana ion could be he cumula-
i e na u e o ins i u ional e ec s o e ime. While high-quali y ins i u ions may ini ially
con ibu e o economic g ow h and de elopmen , hei impac on inequali y may become
mo e p onounced as hei e ec s compound o e he long e m (Kau mann e al.,2009).
The in e ac ion be ween e ec i e VAT and ins i u ional quali y sugges s ha VAT’s
impac on inequali y depends on ins i u ional quali y. The in e ac ion e m be ween VAT
and ins i u ional quali y on inequali y is signi ican ly posi i e, sugges ing ha he ins i-
u ion ein o ces he posi i e e ec o EVAT on inequali y in SSA. This co esponds wi h
Ex ac i e Ins i u ions, which cen alize powe and weal h in he hands o a selec ew,
limi economic p ospec s o he majo i y, and equen ly exhibi co up ion and eeble
adhe ence o legal no ms. Consequen ly, his os e s economic s agna ion and subs an ial
income dispa i ies. The e o e, weak ins i u ions—such as co up ion, lack o anspa ency,
Economies 2025,13, 81 16 o 22
and ine ec i e go e nance—can unde mine he p og essi eness o VAT policies. In en i-
onmen s wi h poo ins i u ional quali y, VAT may become eg essi e, disp opo iona ely
bu dening lowe -income households, and exace ba ing income inequali y. Mo eo e , weak
ins i u ions may hinde he p ope u iliza ion o VAT e enues, limi ing hei impac on
educing inequali y.
In his con ex , inancial de elopmen u he complica es he ela ionship be ween
VAT and inequali y. While inancial de elopmen i sel is no included in he model, i is
impo an o ecognize ha a well-de eloped inancial sec o can imp o e ax collec ion
e iciency, enhance inancial inclusion, and p o ide he means o mo e inclusi e economic
g ow h. Wi hou a s ong inancial sec o , howe e , VAT may ha e limi ed posi i e e ec s
on inequali y, especially i i is no accompanied by b oade economic policies ha p omo e
weal h dis ibu ion and access o inancial se ices. Ul ima ely, he in e ac ion be ween
VAT, ins i u ional quali y, and inequali y in SSA depends on he ins i u ional amewo k
wi hin which hese policies ope a e.
The unexpec ed indings o his s udy sugges ha complex dynamics a e a play. One
po en ial explana ion could be he eg essi e na u e o VAT, compounded by disc epancies
in how ins i u ional quali y impac s di e en socie al g oups. Despi e VAT’s in ended ole
as a b oad-based consump ion ax, i s bu den disp opo iona ely a ec s lowe -income
households, who alloca e a la ge sha e o hei income o consump ion (Bi d & Gend on,
2007). In se ings whe e ins i u ional quali y is lacking, he implemen a ion o VAT may
wo sen exis ing inequali ies by placing a hea ie inancial s ain on ulne able popula ions.
Mo eo e , he heigh ened long- e m impac o he in e ac ion be ween VAT and
ins i u ional quali y may a ise om he cumula i e e ec s o ins i u ions o e ime. Ini ially,
high-quali y ins i u ions, in conjunc ion wi h VAT, may con ibu e o economic g ow h and
ad ancemen . Howe e , o e ime, he pe sis en in luence o ins i u ional quali y could
magni y i s e ec on inequali y, esul ing in en enched dispa i ies in income and weal h
dis ibu ion (Acemoglu & Robinson,2008).
Addi ionally, he a ying capaci y o ins i u ions o add ess he edis ibu i e e ec s
o VAT may also play a ole in he obse ed phenomenon. In a eas whe e ins i u ional
quali y is de icien , VAT e enues may be suscep ible o misapp op ia ion o misalloca ion,
exace ba ing he weal h di ide be ween a luen and impo e ished indi iduals (Gup a
e al.,2002).
Unde s anding he pe sis en impac o VAT on inequali y in SSA necessi a es conside -
ing he a iable o e hnic agmen a ion and i s in e ac ion wi h VAT. E hnic agmen a ion
ini ially exace ba es income inequali y in he sho e m, as e idenced by social seg ega ion
and unequal access o esou ces wi hin di e se communi ies (Alesina e al.,2003). Howe e ,
in he long un, al hough e hnic agmen a ion con inues o in luence income inequali y
posi i ely, i s signi icance diminishes s a is ically, likely due o enhanced social cohesion
and he eme gence o inclusi e ins i u ions ha mi iga e i s e ec s o e ime (Mon al o &
Reynal-Que ol,2005). Hence, policymake s should p io i ize inclusi e policies os e ing
social cohesion and equi able esou ce dis ibu ion ac oss di e se communi ies (Alesina
e al.,2003). Mo eo e , in es men s in inclusi e go e nance s uc u es and economic de el-
opmen ini ia i es can con ibu e o educing income dispa i ies along e hnic lines in he
long e m (Mon al o & Reynal-Que ol,2005). These indings esona e wi h empi ical e i-
dence and compa a i e s udies, indica ing ha e ec i e policies and ins i u ional e o ms
ha e he po en ial o alle ia e he ini ial impac s o e hnic di e si y on income inequali y
(Fea on,2003).
The in e ac ion be ween VAT and e hnic agmen a ion exace ba es income inequali y
in Sub-Saha an A ica (SSA) o e bo h sho and long ime ames, wi h he long- e m con-
sequences being mo e p onounced. In he sho e m, he amalgama ion o high VAT a es
Economies 2025,13, 81 17 o 22
and e hnic di e si y ampli ies income dispa i ies due o ac o s such as unequal esou ce
alloca ion and social seg ega ion p e alen in e hnically agmen ed socie ies (Alesina e al.,
2003;Bi d & Zol ,2005). O e ime, hese dispa i ies a e compounded by he sus ained
eg essi e e ec s o VAT, leading o deepe and mo e en enched income inequali ies as
e hnic di isions and unequal ax bu dens pe pe ua e economic disad an ages (Mon al o &
Reynal-Que ol,2005). To add ess hese challenges, policymake s mus implemen measu es
o alle ia e he eg essi e impac o VAT, including he adop ion o p og essi e ax policies
and ensu ing ha VAT e enues suppo social p og ams o ma ginalized g oups, while
concu en ly p omo ing social cohesion and educing e hnic ensions (Alesina e al.,2003;
Bi d & Zol ,2005). In he long e m, s a egies should p io i ize inclusi e go e nance,
expand educa ional oppo uni ies, and ensu e equi able esou ce dis ibu ion o mi iga e
he compounded e ec s o VAT and e hnic agmen a ion, he eby os e ing in e -e hnic
in eg a ion and educing income dispa i ies (Mon al o & Reynal-Que ol,2005). These
indings a e consis en wi h empi ical e idence om o he egions, unde sco ing he en-
du ing in luence o ax policies and e hnic di e si y on income inequali y and emphasizing
he need o comp ehensi e policy app oaches ha add ess bo h ax ai ness and social
cohesion (Fea on,2003;Bi d & Zol ,2005).
Educa ional dispa i ies play a signi ican ole in ueling income inequali y in SSA, a
phenomenon ha is consis en wi h he Skill-Biased Technological Change (SBTC) heo y.
This heo y posi s ha a ia ions in skills among wo ke s lead o dispa i ies in p oduc i i y
and income le els. Howe e , he impac o hese inequali ies is mo e p onounced o e he
long e m compa ed o he sho e m. In he immedia e sense, unequal access o quali y
educa ion ansla es in o immedia e income gaps, as indi iduals om disad an aged back-
g ounds s uggle o secu e well-paying employmen oppo uni ies. Ye , as ime p og esses,
hese educa ional disc epancies compound, esul ing in deepe - oo ed income dispa i-
ies. The cumula i e ad an ages con e ed by educa ion mean ha indi iduals lacking
educa ional oppo uni ies ace endu ing economic se backs, hus widening he income
di ide. The e o e, add essing educa ional inequali y eme ges as a c i ical impe a i e o
policymake s. S a egies should en ail augmen ing unding o educa ion, implemen ing
a ge ed in e en ions, enhancing educa ional in as uc u e, and os e ing inclusi e poli-
cies. Suppo ing his s ance, empi ical e idence om o he egions, such as La in Ame ica,
unde sco es he impe a i e o equi able educa ion sys ems in amelio a ing income in-
equali y (UNESCO,2018;Wo ld Bank,2020;UNICEF,2019;OECD,2020;Black & De e eux,
2011;Psacha opoulos & Pa inos,2018;Bou guignon e al.,2007;Milano ic,2016).
5. Conclusion and Policy Implica ions
Despi e he global economy g owing a an e e -inc easing a e in ecen yea s, income
dispa i y has been inc easing in bo h de eloping and de eloped economies. The d i e s
o income dispa i y ha e been s udied in exis ing li e a u e, including he ax sys em.
Howe e , he empi ical e idence on he ela ionship be ween he ax sys em and income
dispa i y has so a yielded conclusions ha a e s ongly con adic o y, and ins i u ional
quali y has ecei ed li le a en ion. The e o e, his s udy in es iga es he join impac s o
EVAT (calcula ed as o al VAT e enues di ided by inal consump ion, which e lec s he
economic incidence o he ax a he han i s legal de ini ion as mos ly used in he li e a u e)
and ins i u ional quali y
9
on income dispa i y in SSA. We use SGMM o accoun o he
po en ial endogenei y. This pape i s es s whe he EVAT inc eases income inequali y in
SSA in bo h he sho and long un. Second, we examine whe he he ela ionship be ween
EVAT and income inequali y depends on ins i u ional quali y in bo h he sho and long
e m. We ind ha EVAT augmen s he income gap in bo h he sho and long un. Wi h
his esul , he Reg essi i y Theo y o VAT, which s a es ha a ise in VAT leads o a ise in
Economies 2025,13, 81 18 o 22
income inequali y in SSA, is con i med. Howe e , he impac o he long e m is s onge
han ha o he sho un. In addi ion, he indings show ha ins i u ional quali y ein o ces
he posi i e e ec o EVAT on income dispa i y in SSA. This sugges s ha ins i u ional
quali y plays a main ole in augmen ing he impac o EVAT on income inequali y. To be e
unde s and he ela ionship be ween EVAT and highe and pe sis en income dispa i y in
SSA, his s udy con ibu es o he li e a u e by including some signi ican con ol a iables
such as gende equali y, educa ional inequali y, e hnic agmen a ion, e c. Speci ically, we
ind ha e hnic agmen a ion is one o he signi ican ac o s ha impedes e ec i e VAT o
lowe income dispa i y in he sho and long un in SSA. In addi ion, educa ional dispa i y
plays a signi ican ole in d i ing income inequali y in SSA, aligning wi h SBTC heo y.
D awing om he indings ha e ec i e VAT exace ba es income inequali y o e
bo h sho and long ime ames, wi h a heigh ened impac obse ed in he la e , and
ha ins i u ional quali y ein o ces his pa e n, along wi h addi ional insigh s in o he
consequences o e hnic agmen a ion and educa ional dispa i ies, he ollowing policy
p oposals a e sugges ed:
•
Re ise VAT Policies: Ree alua e and adjus VAT policies o mi iga e hei ad e se
e ec s on income dis ibu ion. This could en ail implemen ing a ge ed exemp ions o
educed a es o essen ial goods and se ices p edominan ly u ilized by lowe -income
households. Addi ionally, explo e a enues o inco po a ing p og essi e elemen s
in o he VAT amewo k o ensu e a ai e dis ibu ion o he ax bu den ac oss a ious
income le els.
•
To add ess he pe sis en issue o income inequali y in Sub-Saha an A ica (SSA),
s eng hening ins i u ional quali y is essen ial. E ec i e go e nance, he ule o law,
and adminis a i e e iciency mus be p io i ized o imp o e ax collec ion p ac ices
and ensu e he e icien use o VAT e enues. Coun ies wi h s onge ins i u ions a e
be e posi ioned o educe co up ion, ensu e ha ax e enues a e ai ly alloca ed,
and in es in social p og ams ha a ge ma ginalized communi ies. D awing om
success ul examples in o he egions, SSA could conside policies such as enhancing
anspa ency in public spending, p omo ing iscal decen aliza ion o imp o e local
go e nance, and implemen ing mo e igo ous ax compliance measu es, especially
a ge ing he in o mal sec o . Fo ins ance, e o ms in Rwanda and Bo swana ha e
success ully bols e ed ax e enues and enhanced social wel a e sys ems by imp o -
ing ins i u ional amewo ks and go e nance (Kau mann e al.,2020). Addi ionally,
s eng hening he judicia y and public adminis a ion would ensu e ha VAT e enues
a e used e ec i ely o po e y alle ia ion p og ams. Such e o ms would imp o e
he edis ibu i e capaci y o he ax sys em, he eby con ibu ing o a mo e equi able
dis ibu ion o weal h and educing he eg essi e impac s o VAT in SSA.
•
Add ess E hnic F agmen a ion: De elop s a egies ocused on os e ing social cohesion
and amelio a ing e hnic di isions o p omo e a mo e inclusi e socie y. Ini ia i es like
in e -e hnic dialogue, cul u al exchange p og ams, and a i ma i e ac ion measu es can
se e o b idge socie al gaps and acili a e a mo e equi able dis ibu ion o esou ces
and oppo uni ies.
•
Comba Educa ional Inequali y: Implemen measu es aimed a add essing educa ional
dispa i ies and expanding access o quali y educa ion o all segmen s o socie y. This
may in ol e inc eased in es men in educa ional in as uc u e, expanded schooling
oppo uni ies in unde se ed egions, and a ge ed assis ance o disad an aged
s uden s h ough schola ships and inancial aid p og ams.
•
Enhance Tax Sys em E iciency: In es in enhancing he e iciency and e icacy o
he ax sys em by mode nizing ax adminis a ion p ocesses, o i ying compliance
mechanisms, and clamping down on ax e asion and a oidance. S eng hening ax
Economies 2025,13, 81 19 o 22
en o cemen can ensu e he equi able collec ion o VAT e enues and con ibu e o
na owing income dispa i ies.
•
Fos e Inclusi e Economic G ow h: P omo e policies conduci e o os e ing inclusi e
economic g ow h and c ea ing pa hways o income gene a ion and weal h accumu-
la ion ac oss di e se segmen s o he popula ion. This could en ail suppo ing he
de elopmen o small and medium-sized en e p ises, in es ing in oca ional aining
ini ia i es, and os e ing en ep eneu ship oppo uni ies in ma ginalized communi ies.
•
Collabo a e In e na ionally: Engage in collabo a ion wi h in e na ional o ganiza ions
and de elopmen pa ne s o exchange knowledge, expe ise, and inancial esou ces
aimed a add essing income inequali y and enhancing ax sys ems in Sub-Saha an
A ica. Pa icipa ion in egional and global ini ia i es can acili a e he implemen a-
ion o policy e o ms gea ed owa ds achie ing sus ainable de elopmen goals and
os e ing a mo e equi able socie y.
•
The g ay economy in Sub-Saha an A ica plays a c i ical ole in shaping he e ec-
i eness o VAT en o cemen and in luencing income inequali y. I includes in o mal
economic ac i i ies, anging om small businesses o e ing basic se ices o la ge,
un epo ed capi al-in ensi e ope a ions, and ope a es ou side he o mal axa ion
sys em. This unde mines VAT en o cemen by educing he axable base, as many
in o mal businesses a e no egis e ed, leading o lowe ax e enues. This, in u n,
limi s he go e nmen ’s abili y o und public se ices o edis ibu i e p og ams
aimed a educing inequali y.
•
The impac o he g ay economy on VAT en o cemen a ies ac oss sec o s. Small,
labo -in ensi e businesses, such as s ee endo s, ypically do no gene a e signi ican
VAT liabili ies, meaning VAT collec ion is less a ec ed in hese a eas. Howe e ,
la ge , capi al-in ensi e sec o s (e.g., manu ac u ing, mining, cons uc ion) con ibu e
signi ican ly o ax e asion due o unde epo ing, which educes public e enues and
exace ba es income inequali y by limi ing he esou ces a ailable o edis ibu ion.
•
VAT is a eg essi e ax, disp opo iona ely impac ing lowe -income households who
spend a la ge sha e o hei income on consump ion. In economies whe e he g ay
economy is domina ed by capi al-in ensi e en i ies, his eg essi e e ec is in ensi ied,
as weal hie indi iduals and businesses e ade VAT by no decla ing income, lea ing
poo e consume s o bea he ax bu den. Howe e , i he g ay economy consis s
p ima ily o low-cos se ices, such as ood and household labo , he eg essi e impac
o VAT may be somewha mi iga ed, as hese se ices end o place a smalle bu den
on poo e households.
•
While he g ay economy does no di ec ly con ibu e o o mal income edis ibu ion,
i p o ides supplemen a y income h ough in o mal ac i i ies like subsis ence a ming
o s ee ending. These in o mal ac i i ies help supplemen household incomes,
o e ing a o m o subs i u e edis ibu ion ha imp o es pu chasing powe bu does
no add ess nominal income inequali y.
•
In he long e m, he g ay economy hampe s he abili y o collec su icien ax e enue,
making i ha de o in es in essen ial public se ices like educa ion and heal hca e. In
he sho e m, i may alle ia e income inequali y by p o iding low-cos se ices, bu i s
impac on o e all inequali y depends on he sec o s in ol ed in he in o mal economy.
By implemen ing hese policy ecommenda ions, policymake s can add ess he un-
de lying d i e s o income inequali y in Sub-Saha an A ica, including he impac o VAT,
ins i u ional quali y, e hnic agmen a ion, and educa ional dispa i ies, hus os e ing a
mo e equi able and inclusi e socie y.
Economies 2025,13, 81 20 o 22
Au ho Con ibu ions: Concep ualiza ion, T.P.V.; me hodology, N.N. and T.P.V.; so wa e, N.N.;
alida ion, N.N.; o mal analysis, T.P.V.; in es iga ion, N.N. and T.P.V.; esou ces, N.N. and T.P.V.;
da a cu a ion, T.P.V.; w i ing—o iginal d a p epa a ion, T.P.V.; w i ing— e iew and edi ing, T.P.V.
and N.N.; isualiza ion, N.N. and T.P.V.; supe ision, N.N. All au ho s ha e ead and ag eed o he
published e sion o he manusc ip .
Funding: This esea ch ecei ed no ex e nal unding.
Ins i u ional Re iew Boa d S a emen : No applicable.
In o med Consen S a emen : No applicable.
Da a A ailabili y S a emen : The da a o his s udy can be ound a : (i) SWIID (S anda dized Wo ld
Income Inequali y Da abase–F ede ick Sol ); UNU Wibe ; WDI-Wo ld Bank.
Con lic s o In e es : The au ho s decla e no con lic o in e es .
Appendix A
A1. Lis o coun ies: Bo swana, Leso ho, Bu kina Faso, Bu undi, Cabo Ve de, E hiopia,
Gabon, Gambia, Madagasca , Mali, Mau i ius, Mau i ania, Senegal, Swaziland, Came oon,
Cen al A ican Republic, Chad, Cô e d’I oi e, Guinea, Equa o ial Guinea, Guinea-Bissau,
Ghana, Kenya, Mozambique, Namibia, Nige , Nige ia, Tanzania, Rwanda, Seychelles,
Sie a Leone, Uganda, Zambia, Zimbabwe, Sou h A ica.
No es
1The lis o coun ies is in he Appendix A.
2(1995–1997, 1998–2000, 2001–2003, 2004–2006, 2007–2009, 2010–2012, 2013–2015, 2016–2018, 2019–2021).
3
O e yea s, income dispa i y slowly a ies wi hin coun ies. This shows ha some unobse ed ac o s may be esponsible o
his ime pe sis ence. I hese ac o s a e associa ed wi h ou eg esso s in his con ex , ixed-e ec s es ima es a e biased. The lag
o income dispa i y mus be included as an eg esso in o de o add ess his p oblem.
4Fo discussion on he long- un p opensi y in dis ibu ed lag models, see Woold idge (2013).
5Causali y es esul s will be made a ailable upon eques .
6
To a oid he issue o oo many ins umen s in he sys em GMM es ima o , we used EVAT as ins umen s. This decision is also
in luenced by he c i e ion ha he numbe o ins umen s should, in heo y, be less han he numbe o coun ies (Roodman,
2009) and he AR (3) es esul s. Ou key esul s a e obus o limi ing he endogenous a iable u ilized as ins umen s.
7
No e ha we in e p e only he long un coe icien s o signi ican sho un coe icien s. The long un impac s o he K h
pa ame e is compu ed as: βk/[1−∅]. Whe e βkis he sho un coe icien and ∅ ep esen s he lag o he dependen a iable.
S a a command o he long un: nlcom (_b[indep a ])/(1-_b[L1.dep a ]). Since he e ec o go e nmen spending using VAT
may ake se e al yea s be o e i has an impac on ins i u ional quali y ou comes and he pe iod is qui e long enough, we use
3 yea o lag ins ead o 1 yea o lag.
8We also obse e ha he in oduc ion o in e ac ion e m in columns 7 and 8 s enghen he model.
9
We u ilized PCA o a composi e index o ins i u ion quali y index including con ol o co up ion, poli ical s abili y and absence
o iolence/ e o ism, go e nmen e ec i eness, egula o y quali y, ule o law, and oice and accoun abili y.
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Disclaime /Publishe ’s No e: The s a emen s, opinions and da a con ained in all publica ions a e solely hose o he indi idual
au ho (s) and con ibu o (s) and no o MDPI and/o he edi o (s). MDPI and/o he edi o (s) disclaim esponsibili y o any inju y o
people o p ope y esul ing om any ideas, me hods, ins uc ions o p oduc s e e ed o in he con en .
