Consumption Taxes, Income Distribution and Poverty – Evidence from Kenya

Beate Jochimsen, Anne Wanyagathi Maina

FiFo / December 2019 / Discussion Paper, FiFo-Köln

Abstract
‘No Poverty’ and ‘Reduced Inequalities’ are two out of the 17 sustainable development goals of the United Nations. Nowa-days, Kenya faces high levels of poverty and inequality: 36 percent of the population live below the poverty line and the Gini coefficient was 0.445 in 2015. Against this background, this paper investigates how consumption taxes can be used to reduce poverty and promote income equality in Kenya. Using econometric models we show the effect of consumption taxes on income inequality and on GDP per capita. In line with the literature, our findings confirm that consumption taxes are regressive. Thus, fiscal policy could reduce this consequence by using differentiated tax rates with lower rates applied to basic goods on which the poor spend a higher share of their disposable income. In Kenya, consumption tax revenue is positively related to the GDP per capita. This might point to a successful fiscal policy in Kenia that uses consumption tax revenue to provide essential facilities for the poor leading to an increase of overall welfare.