Equity in unequal deductions : implications of income tax rules in Ghana and Nigeria

Abstract

In many African countries, the amount of personal deduction for income tax purposes increases with the taxpayer's income. At first glance, this appears to give larger tax breaks to the rich than to the poor. On closer examination, this notion turns out to be false. As this paper shows, each tax system with"income dependent tax deductions"(IDTDs) is fully equivalent to a particular conventional progressive tax system with standard deductions. One implication for comparative tax research is that the tax schedule of a country that uses IDTDs should not be compared directly with a conventional tax schedule in another country. Existing cross-country work on tax deductions and marginal tax rates generally fails to recognize that IDTDs invalidate a straightforward comparison. To make the two systems comparable, a transformation like the one suggested in this paper is needed.Public Sector Economics&Finance,Environmental Economics&Policies,Tax Policy and Administration,Taxation&Subsidies,Governance Indicators