The social welfare impact of double tax treaties in Sub Saharan Africa

Abstract

Purpose This study aims to analyze tax revenue in the presence of double tax treaties affecting social welfare of the inhabitants in the Sub-Saharan African (SSA) developing economies, whose fiscal regimes are being branded as responsible for exacerbating poverty for the inhabitants. This paper seeks to determine if double tax treaties are negatively impacting on human development of the host countries. Design/methodology/approach This study analyses 21 SSA countries from 1996 to 2016 using panel models and bootstrapped quantile regression. It uses a devised mathematical model which introduces the interaction between tax revenue and double tax treaties and measures the social welfare impact using the human development index (HDI). Findings The findings have broadly shown that (i) the net effect from the complementarity between tax revenue and double tax treaty (DTTs) in influencing the human development is for the most part negative (ii) the impact of tax revenue from international trade has the most positive net effect as compared to other tax revenues when interacted with the DTT and (iii) the DTT complements the tax revenue from income, profits and capital gains to progressively increase human development in the upper quartiles of HDI. Research limitations/implications This study has examined how the presence of double tax treaties has impacted the effect of tax revenue on human development in 21 SSA countries for the period 1996–2016. A mathematical model was devised and bootstrapped quantile regression was used owing to the specificities of the sample. In accordance with recent literature on net effects, the results were interpreted. Practical implications It is evident that further research is required on whether double tax treaties are indirectly responsible for poverty on the rise in SSA countries or on the contrary, they bring FDI alongside with other positive spillovers which in the end contribute to a rise in the human development aspect of societies in developing host economies. Social implications The HDI is an important measure used nowadays for human development as a proxy for social welfare. This research will use an HDI mathematical model devised by Sinha and Sengupta (2019) and adapt it to the context to testing econometrically whether double tax treaties have an impact on welfare or poverty reduction. The empirical results will help determine whether tax treaties are impacting the social welfare positively or negatively. Originality/value This result is the first research attempt to consider both the impact of tax revenue (which is expected to have a positive impact on social welfare of the people of the host developing countries) and the impact of double tax treaties simultaneously. It is the first empirical study focusing on the impact of tax revenue on human development in the presence of double tax treaties. Its methodology is original and adds to the current literature to benefit policymakers and academia.

The impact of tax reforms on human development index: Literature review approach

“…Human Development Index—HDI is an index proposed by the UNDP to measure well‐being of the people of a country worldwide (Gaye, 2011; Ghislandi et al, 2018; Graafland, 2019; Isaac et al, 2021; Khodabakhshi, 2011; Mazzanti et al, 2020; Mwabukojo, 2019; Ofosu‐Mensah Ababio et al, 2020; Soondram et al, 2022; Talaber, 2006; United Nations, 2007; Varlitya et al, 2018). Human Development Index is a very useful measure for international comparison between countries in respect of people's welfare (Perez & Claveria, 2020; Ülengin et al, 2011).…”

“…Governments are recommended to apply effective tax policy changes for budget deficits as more tax revenue will be collected (Anojan, 2014;Levin, 2001). According to Soondram et al (2022), international tax revenue induces the level of human development in the country; however, taxes on goods and services pose a negative impact on human development. Sorana et al (2019) entail that when people pay taxes and the governments utilise such tax revenue efficiently on better social services, the welfare of the society and better human development will be ensured and hence long-term sustainable economic growth of the country as a whole.…”

“…Human Development Index—HDI is an index proposed by the UNDP to measure well‐being of the people of a country worldwide (Gaye, 2011; Ghislandi et al, 2018; Graafland, 2019; Harttgen & Klasen, 2011; Herrero et al, 2010; Khodabakhshi, 2011; Mazzanti et al, 2020; Mtei et al, 2012; Mwabukojo, 2019; Soondram et al, 2022; Stewart, 2019; Talaber, 2006; United Nations, 2007; Varlitya et al, 2018).…”

Islamic Banking Financial Inclusion and Tax Revenue in OIC Countries: To What Extent do They Correlate?

“…We also perform diagnostic tests through multicollinearity, serial-correlation, and Multicollinearities testing is based on the Variance Inflation Factor (VIF) where if the VIF value is less than 10 then it is free from multicollinearity problems (Al-Own & Bani-Khalid, 2021). The serial-correlation test is an important test in panel data, in this test the correlation will provide information clues that there is a correlation between entities (Soondram et al, 2022) so that misleading results do not occur (Muhammad et al, 2021). based on the Cross-Section Dependence Test based on CD Pesaran because the N in the study is more than T (Bui, 2019)and has been widely applied because it is robust in many modeling specifications (Baltagi et al, 2016)and the heteroskedastic test using the glajser test was carried out by regressing the results of the residuals generated from the original equation in the form of absolute values for exogenous variables (Wang et al, 2020).…”