The Impact of Reforming Energy Subsidies, Cash Transfers, and Taxes on Inequality and Poverty in Ghana and Tanzania

The paper explains methods developed by the Commitment to Equity Institute to simulate policy changes and uses them to assess the distributional consequences of three types of policy reform in Ghana and Tanzania: removal of energy subsidies, expansion of conditional cash transfer programs, and shifts in the balance between indirect and direct taxation. The methods are simple to implement and provide a first-order approximation to the true distributional effects. In both countries energy subsidies are substantial and popular but regressive despite the use of lifeline tariffs for electricity consumption. Their removal would reduce inequality but also increase poverty by a non-trivial amount because the poor do garner some benefit from the subsidies. A simultaneous expansion of cash transfer programs could offset the poverty consequences at significantly lower fiscal cost than that of the energy subsidies. In both countries direct taxes are more progressive than indirect taxes, yet shifting taxation from indirect to direct taxes has relatively little effect on inequality and poverty because the incidence of the two is not so different as, for instance, the difference between taxes and a strongly progressive expenditure like conditional cash transfers.