Claire Kumar Kenya 2 nd December 2014 Taxation and Inequality International Tax Academy on Tax Justice: Financing Development in Africa

Inequality: an issue for our time Who is talking about it? What is behind the acceleration of the debate?

Why do we care? The moral position The inequality-poverty connection Global research: ‘inequality matters significantly in determining global poverty projections’ (Peter Edward and Andy Sumner, The Future of Global Poverty in a Multi-Speed World: New estimates of scale and location, , Centre for Global Development, 2013 More unequal societies have worse social outcomes Wilkinson and Pickett, The Spirit Level: Why Equality is Better for Everyone Conflict, violence and insecurity Money buys power

How big is the problem anyway? Oxfam: Even it Up: Time to end extreme inequality, richest people as wealthy as the poorest half of the world Saez: US income Top 1% up 31.4% Bottom 99% up 0.4% OECD: 3 decades prior to 2008 Wage gaps widening and income inequality increasing in a majority of countries

And in sub Saharan Africa?

The IMF says: On average across the region income inequality appears to be decreasing, but Their data is old (up to 2005) Of 40 countries studied: For 17 it was decreasing For 9 it was increasing (Niger, Rwanda, Ghana, Cote d’Ivoire, Madagascar, Mozambique, Nigeria, Tanzania, Mali) 14 countries left out (including Angola, Cape Verde, Comoros, Liberia, Namibia, Zimbabwe ) Francesca Bastagli, David Coady and Sanjeev Gupta, Income Inequality and Fiscal Policy, IMF Staff Discussion Note, SDN/12/08, June 2012

TJN-A research: 8 countries: Ghana, Kenya, Malawi, Nigeria, South Africa, Sierra Leone, Zambia, Zimbabwe

TJN-A findings on inequality Ghana and Nigeria: income inequality consistently increasing South Africa, Kenya and Malawi: fluctuations, including recent increases South Africa: note the sharp rise of the top 5% Zambia: early declines but now rising fast Sierra Leone: consistent declining trend (but very limited data) Zimbabwe: no data

TJN-A findings on inequality: Nigeria Ghana South Africa Zambia Change in income share of 10% richest +17%+20%+15%+21% Change in income share of bottom 40% -9%-19%-18%No change Word Bank, Poverty and Inequality Dataset

Why is inequality rising? The growth model? The taxation model?

Why tax matters? Redistributive measures Progressive taxation Land reforms Increasing incomes of the poor Setting / increasing minimum wages Social protection systems (basic income grants / unemployment benefits, cash transfers, pensions, public works schemes etc.) To tackle inequality we need:

How much difference does it make? Before tax and welfare spending, Germany and Belgium are more unequal than the US (Ha Joon Chang) Inequality in Latin America and the Caribbean is similar to many developed nations – the differences lies in policies of redistribution Series of studies in Latin America: ‘they all suggest slightly regressive tax systems which far from improving the distribution of income, actually encourage greater inequality’ (ECLAC, The Tax Gap and Equity in LAC, Fiscal Studies No. 16, 2010) Absence of studies related to inequality before and after tax in sub-Saharan Africa

A taxation model gone wrong Declining top marginal income tax rates (1970s: 70%) Tax consensus: ignore redistribution aspects focus on consumption/sales taxes Weakening corporate tax contributions Exemptions/incentives International corporate tax system ‘not fit for purpose’ Poor extractives taxation models Poor performance of other asset and income taxes PIT (outside of PAYE); Property tax ; Capital gains Major challenges taxing High Net Worth Individuals Enabling financial secrecy and proliferation of use of tax havens TJN-A thesis: ‘financial secrecy and tax havens undermines progressive taxation’: Can Africa achieve progressive taxation in this context?

What can we do about it? Global wealth tax? New ‘income tax consensus’: ‘the 1% should pay tax at 80%’ (Saez and Piketty) An alternative approach to international corporate taxation Reform international tax rules to ensure a fairer allocation of tax between countries (including removing the rationale for the use of secrecy jurisdictions) Reform countries’ tax systems which have particularly harmful spillover impacts Move from a damaging framework of global tax competition to an enlightened framework of tax cooperation.

What can we do about it? Refocus revenue authorities (and donor assistance) on direct taxes of income and assets Corporate income tax Personal income tax Capital gains tax Property tax Enforce minimum standards on data: Inequality before and after tax (and social spending) Tax incidence analysis per tax type