After a decade of high growth, a new narrative of optimism has taken hold about Africa and its economic prospects. Alongside buoyant growth rates, there has been some poverty reduction and some positive progress in sectors such as health and education. However, despite this, there is a broad consensus that progress in human development has been limited given the volume of wealth created. There is growing concern that the high levels of income inequality in sub-Saharan Africa are holding back progress.
This report investigates the issue of income inequality in eight sub-Saharan African countries (Ghana, Kenya, Malawi, Nigeria, Sierra Leone, South Africa, Zambia and Zimbabwe). It looks at national taxation systems and international taxation issues – and, critically, the relationship between them. In this way it reveals how the enabling environment for tax dodging impacts on national tax systems in sub-Saharan Africa. It has a special focus on the experiences of two countries – Kenya and South Africa – which have two of the stronger tax systems in sub-Saharan Africa but which also have extensive shortcomings in the area of tax equity.
- The evidence gathered in this report shows that increasing income inequality should be of huge concern to governments in at least six out of the eight countries – Ghana, Nigeria, South Africa, Zambia, Kenya and Malawi. In Ghana and Nigeria, income inequality is rising strongly. In Nigeria, between 1986 and 2010, there has been a 75% increase in the concentration of income in the country. In Ghana there has been a 50% increase in the concentration of income over an 18-year period. In Zambia income inequality is now at its highest levels since data was collected. South Africa has one of the highest levels of inequality in the world and one which keeps increasing.
- It is also clear that this trend is not just a result of the rich getting richer. There is clear evidence that this is at the expense of the poor who are also getting poorer, and are therefore actively impoverished in this process. As Tax Justice Network research has shown, both wealth and inequality are being dramatically underestimated to a very significant degree, in every study and in every country. In this context of rising inequality, the role of taxation in redistributing income is particularly critical, with progressive tax systems being one of the most important tool available to governments. However, the report shows the extent to which illicit financial flows undermine this prospect.
- A central contention of this report is that rising income inequality is going hand in hand with – and is ultimately caused by – the current growth model and the illicit financial flows which have increased significantly throughout Africa’s high growth concentration of wealth, but income inequality is also being considerably exacerbated by the inability of governments to tax the proceeds of growth, because a large part of sub-Saharan Africa’s income and wealth has escaped offshore. Much of this is also driven by the reliance on the natural resource sector, which is known to be rife with tax-dodging techniques.
- The UK is a recognised beneficiary. A recent report from Jersey Finance shows the extent of African assets held on the island: £9.4bn in customer deposits in banks (as compared to £3bn from China) and £31bn in Jersey trusts (as compared to £1bn from China). While the UK – and a small number of Africa’s super rich – are gaining via the structure of offshore finance in Jersey, African citizens are losing significantly.
- The report also finds that, to a large degree, governments are hamstrung in their efforts to tackle income inequality. To make progress, sub-Saharan Africa must be able to tax its vast income and assets held offshore. This means tackling illicit financial flows and tax dodging in all its forms. However, as this report spells out, there are severe limits to national level action. Systemic, global reforms are a vital part of the answer. Progress at this level had been haltingly slow, though recent developments have shown promise. Yet, while discussions advance in the G8, G20 and OECD, it is still far from certain whether African countries will be correctly included in, and benefit from, the projects and reforms, as these are designed to benefit G20 and OECD countries first and foremost, over the sub-Saharan African countries that are most in need.
- While illicit financial flows undermine the scope for African governments to put in place progressive tax systems, tax systems have also been heavily influenced by the tax consensus, led by the International Monetary Fund (IMF) and supported by other multilateral institutions, bilateral donors and tax professionals. The tax consensus has focused on reducing corporate and, to a lesser extent, personal income tax rates while expanding the base for consumption taxes and value added tax (VAT) in particular. Its impacts have been well documented and have contributed to a heavy reliance on indirect taxation at the expense of more progressive income and wealth taxes.
- If countries in Africa cannot tax income and wealth correctly, they will shift the tax burden onto the poor – as this report demonstrates. While individual governments must be held accountable for their policy choices, the international community must shoulder a lot of the responsibility for increasing economic inequalities and for the shortcomings of tax systems and public finances in sub-Saharan Africa.