The Effect of the Liberian Government’s Taxation Policies on Poverty and Inequality

Many low- and middle-income countries engage in tax policy reforms. This is usually motivated by efforts to increase tax revenue collection, and also sometimes to improve equity by reducing the burden of taxation on relatively poorer taxpayers. However, little is known about the extent to which these tax policy reforms affect poverty and inequality, especially at the household level. This study exhaustively analyses the progressivity and effect of taxation policies on poverty and inequality in Liberia, a low-income country, for the first time. After accounting for the informal sector, personal income tax (PIT) was found to be progressive in the pre-2011 tax scheme. However, it is more progressive in the post-2011 tax scheme. The pre-2011 PIT reduced inequality, but increased poverty. The post-2011 PIT also reduced inequality, but there was no incremental change on poverty. A simulated scheme, with a 75 per cent reduction in tax rates for lower taxable income bands, and 75 per cent increase in tax rates for higher taxable income bands, was found to be even more progressive. The simulation also confirmed the reduction in inequality and zero increase in poverty found in the current scenario. Goods and services tax (GST) was found to be progressive in both the pre-2016 and post-2016 GST schemes – implying that the rich pay more GST through their higher purchase of non-food taxable items. GST marginally reduced inequality but increased poverty in the pre-2016 scheme. The post-2016 GST scheme marginally increased inequality and substantially increased poverty. A simulated scheme, with a lower effective GST rate on taxable expenditure below a predefined threshold, and a higher rate on taxable expenditure above the threshold, was found to be more progressive. In addition, the simulation led to a greater reduction in inequality and limited increase in poverty. We suggest that increasing the current rate of PIT by 75 per cent for top income earners, and setting differentiated GST rates (5 per cent of effective GST on lower taxable expenditure and 95 per cent on higher taxable expenditure) will help to boost the equity of, and redistribution from, the Liberian tax system.