Indirect Tax Burden in Ghana: Analysis of Household Poverty

Abstract

The focus on taxation as a primary revenue source for development financing in Least Developed and Middle-Income Countries, and consistent tax reviews raise questions on the potential impact of taxes on household welfare and inequality. In Ghana, poverty is gradually declining due to significant progress in economic growth and the effect on the welfare of households via several welfare intervention strategies. Since assuming constitutional authority, Ghana has embraced a myriad of strategies to reduce poverty, including free education, subsidies for fishermen's fuel, scholarships, skill-training programmes, and school feeding initiatives. Introducing social protection initiatives like Ghana's Livelihood Endowment Against Poverty (LEAP), which focuses on the most vulnerable and impoverished people, shows that the income strategy for eradicating severe poverty is effective. Financing poverty intervention programmes therefore requires a substantial amount of money, often collected through taxes (direct and indirect) Ghana also hopes to develop without the support of foreign aid. However, tax collections and tax-to-GDP ratios are not encouraging compared to some African countries. The tax system and its amendment have not also produced the required results. Despite the developments, consistent tax reviews raise debate on how tax reviews influence various segments of household welfare. The foundation of the study is on the premise of some concerns. First, although there is a wealth of literature on fiscal incidence, inequality, and poverty, there is little information on the anti-poverty aspects of taxation. The impact of taxes on people experiencing poverty in third-world nations has also diminished, partly because the taxes collected don't cover the costs of social programmes that help people experiencing poverty. Few studies also focus on fiscal incidence and poverty relationships and often do not consider a more comprehensive discussion of extended household demographic variables. The study builds on the weakness of the CEQ approach, such as the inclusion of income to analyse the net fiscal impact on poverty and the exclusion of behavioural effects. The study, therefore, employed the Explanatory Sequential Mixed Method Design and supported by the philosophical underpinnings of pragmatism. The GLSS rounds 6 and 7 survey data, tax tariffs, and schedules were used, after which the findings informed the use of a Constructive Grounded Theory (CGT) approach to theoretically sample appropriate households for in-depth interviews on how families respond to tax reviews. The results show that household tax burdens are not static but vary according to household socio-demographic characteristics and consumption items. Total indirect tax incidence is generally higher for lower-income households compared to higher-income households for both periods, suggesting a form of regressivity, and is high among male-type households, such as male-headed, male-dominated, and male-breadwinner homes. Total tax incidence is regressive at 15% and progressive at 12.5%. The import tax burden is consistently high on households in the Northern region. While fuel taxes remain progressive, excise tax incidence is regressive. Consumption expenditures on food, clothing, fuel, and housing are the primary contributors to high household burdens. Food burdens are regressive for female-headed and female breadwinner households. Regionally, while food burdens are high among households in Western and Central regions, utility burdens are higher for the Ashanti and Greater Accra regions. High rural tax incidence on food could be attributed to own produce consumption. The study established that total indirect tax reduces household welfare regardless of the episode; hence, the poverty and squared poverty gaps after-tax increase on average. The strength of the effect also depends on household demographic characteristics. Female-headed and female-dominated households are less poor than male-headed households, while poverty is endemic among rural localities compared to urban localities. The study results further show that education is critical to poverty reduction, while poverty is reduced for households with heads employed compared to those unemployed. The findings reiterate the relevance of improving the agriculture sector as the sector plays a crucial role in food security and household incomes. Poverty incidence after tax is high among households with heads who are employed in the Agricultural sector. Families' understanding and awareness of taxes vary depending on the location and the gender of the household head. While there is no variation in tax knowledge and awareness within the locality by gender of headship, differences exist between the locality and between the gender of the household head by locality. The qualitative part of the study reveals that tax awareness is high among urban households compared to rural counterparts. Most households in the Upper West Region eat staple foods and occasionally purchase imported goods subject to import duty and import VAT. Although stews and soups frequently comprise a large portion of a rural household's total food cost, rural households primarily consume local crops, mainly their produce. Urban households continue to change their consumption in times of rising prices but frequently adopt replacements, whereas rural households do not fluctuate much in their soup intake. The study recommends that interventions for significant poverty reduction should focus on a reduction in the size of the household, and improvement in education, and employment opportunities, as such aspects prove significant in improving household welfare amid taxes. Also, the study recommends a reduction in consumption taxes, particularly VAT and import taxes. The taxes increase poverty and are generally regressive at high rates. Finally, policymakers should simulate the likely effect of tax policies on households before administration, while avoiding the cascading approach to tax assessment. While simulations provide the opportunity to implement tax policies that do not compromise household welfare, removing the approach to assessment will also reduce tax burdens.