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

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.

KEYWORDS:

• Inequality
• spending receipt
• spatial panel
• fiscal redistribution
• neighbouring effects

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. The exclusive provincial responsibility are outlined in Schedule 5 of the constitution and the concurrent functions of national and provincial governments are set out in Schedule 4 of the constitution.

2. In other countries (mainly the federal states), the provinces have the right to make independent decision depending on the social needs within the provinces unlike in South Africa where provinces has only autonomy on marginal revenue collected from their own resources.

3. These include the 1994 Reconstruction, Development Program (RDP), the 1996 Growth, Employment and Redistribution (GEAR), the 2006 Accelerated Shared Growth Initiative for South Africa (AsgiSA) and the 2012 National Development Plan (NDP).

4. The three studies mainly focused on the effect of Personal Income tax on Income inequality using different datasets that includes; project for Statistics on Living Standards, Development (PSLSD), first wave of National Income Dynamic Study (NIDS), 2014/2015 South African Living Conditions Survey (LCS), combination of tax administrative data with wave 2 and wave 4 of (NIDS) datasets.

5. Income and Expenditure Survey (IES) 2005, the General Household Survey (GHS) 2006 and other relevant surveys.

6. The study used 2010/2011 Income and Expenditure Household Survey.

7. In our study, the fiscal redistribution is analysed in the context of social spending since provincial own tax revenue are very minimal, hence this study excludes the distributional effect of tax.