Tanzania is one of the five countries with the most inequality-reducing tax systems on income, according to The Commitment to Reducing Inequality (CRI) Index 2022 released recently.
Other countries are Ireland, Kenya, Lesotho and Argentina. These top 5 performers are referred to as the countries with “the most progressive tax impact”.
Their change in Gini is as follows: Ireland (-0.0595), Kenya (-0.0512), Tanzania (-0.0431), Lesotho (-0.0423) and Argentina (-0.0405). Their percentage points change to pre-tax Gini is as follows: Ireland (-12.9), Kenya (-8.5), Tanzania (-7.1), Lesotho (-6.8) and Argentina (-7.1).
Gini coefficient (also called Gini index or Gini ratio) varies between 0 and 1, with 0 representing perfect equality and 1perfect inequality. It is commonly recognised that Gini index<0.2 represents perfect income equality, 0.2-0.3 relative equality, 0.3-0.4 adequate equality, 0.4-0.5 high income gap and above 0.5represents severe income gap.
According to IMF, the most common metric of inequality is income inequality. This is the extent to which income is evenly distributed within a population.
IMF highlights three related concepts to income inequality as 1) lifetime inequality, which is inequality in incomes for an individual over his or her lifetime; 2) inequality of wealth, which is the distribution of wealth across households or individuals at a moment in time and 3) inequality of opportunity, which is an impact on the income of circumstances over which individuals have no control.
Examples of this include family socioeconomic status, gender or ethnic background. The CRI Index 2022 looks at world governments’ policies and actions in three areas (pillars) which are crucial to reducing the level of inequality, namely 1) public services (health, education and social protection), 2) taxation and 3) labour rights.
Each area or pillar contains three levels of indicator, which measure: 1) policy commitments, 2) coverage or implementation of these commitments and 3) their impact on inequality.
According to the CRI Index 2022, public services performance is assessed on three sets of indicators: public spending, coverage (with equity) and an impact on reducing economic inequality.
Tax policy performance is assessed on the main taxes – personal income tax, corporate income tax and value added tax (VAT) or general sales tax. This indicator also assesses whether a country uses harmful tax practices, behaving like a tax haven and undermining tax collection in their own and other countries.
Another indicator is implementation: how successfully a country collects its main different types of tax and the impact of the tax collected on income inequality measured by the Gini coefficient.
The labour pillar measures three areas of labour rights policy through which world governments can fight against inequality: respect for labour rights, legal protection for women workers and minimum wage.
It then looks at the coverage of labour rights by tracking the proportion of the population that does not legally benefit from these rights. The impact on wage inequality (of policies and coverage) is analysed.
Thus, the CRI Index2022 reviews spending, tax and labour policies and actions of 161 governments across the world on the extent to which they take necessary steps to reduce inequality from 2020–2022.
On tax impact on Gini, the CRI Index 2022 suggests that countries which collect far more VAT and other indirect taxes than direct taxes do not modify indirect taxes to make them inequality-neutral (by exempting small traders and products consumed by those with low incomes) are likely to be increasing inequality.
Yet, countries which collect mostly progressive income tax reduce inequality. “Overall, tax systems are supposed to be a powerful means of reducing inequality, collecting more from those who can afford it most.
However, during the pandemic, national tax systems continued to be slightly regressive, increasing inequality on average within countries by around 1.5 per cent.” The CRI Index 2022shows only 63 countries’ tax systems are reducing inequality, while 97 are increasing it.
“This reflects the continuing dependence of many countries on VAT revenue and their very low collection of progressive income tax.”
As a whole, the CRI2022 report shows, tax systems have continued becoming marginally less regressive, as countries make personal income tax (PIT) more progressive and VAT systems less regressive and collect more of the progressive income tax.
They are estimated to have become less regressive in 96 countries and more regressive in only 58 between the CRI 2020 and CRI 2022.
According toInvestopedia.com, personal income tax is the amount of money collectively received by citizens of a given country.
Its sources include money earned from employment, dividends and distribution paid by investment, rent derived from property ownership and profit sharing from businesses.
On the other hand, progressive income tax involves a tax rate that increases (progresses) as taxable income increases. “It imposes a lower tax rate on low-income earners and a higher tax rate on those with a higher income.”
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