Fuel for regional income inequality in South Africa: redistribution effect of taxes

Abstract

ABSTRACT This paper analyses the effect of fiscal redistribution on regional income inequality in South Africa using the spatial models. Yearly provincial-level data on different spending categories are considered for the period from 2014 to 2018. The study uses various spatial panel specifications to control for both spatial dependence and heterogeneity among provinces. When factor incomes and market prices are controlled for, empirical results indicate that local inequality spills over to neighbouring provinces. Particularly, a basic point increase in local income inequality contributes about 0.14 to 0.158-point increase in income inequality of neighbouring provinces. Furthermore, provincial spending allocation to social development grant and education spurs regional income inequality while expenses receipt on health, infrastructure, and conditional grants exhibit mitigating effects on provincial income inequality. These findings suggest that health, infrastructure, and conditional grants are key sectors to prioritize in the government’s efforts to reduce income inequality.