Effect of Tax Revenue Mobilization on Income Inequalities in West African Economic and Monetary Union Countries (WAEMU)

Abstract

This research examines the effect of different types of tax revenues on income inequality in WAEMU countries over the period 1996 to 2015. Double least squares (2SLS) are used as an estimation technique to analyze the effect of these different types of tax revenues, including total tax revenues (the sum of all revenues), direct tax revenues (which include profit and income taxes), domestic indirect tax revenues (e.g., value added tax and excise duties) and commercial tax revenues (e.g., customs duties). The results show that an increase in direct tax revenues leads to a reduction in income inequality. In other words, progressive income taxation allows for an efficient redistribution of income from richer to poorer people, which contributes strongly to the reduction of income inequality. On the other hand, indirect domestic tax revenues and commercial tax revenues are found to be neutral in income distribution. In fact, WAEMU countries, in order to compensate for the fiscal losses resulting from the reduction of customs tariffs, have adopted a reform of domestic taxation focused mainly on the development of non-progressive indirect taxes, i.e., taxes governed by liberal principles of fiscal neutrality: taxation must not disrupt individual choices of resource allocation. These tax reforms thus explain the neutrality of the effects of indirect taxation in the WAEMU zone. In the light of these results, the paper suggests that WAEMU countries should strengthen the progressivity of direct taxes and always maintain the neutrality of indirect taxes.