Universal Basic Income, Targeted Cash Transfers, and Progressive Taxation: Reducing Income Inequality in South Africa

Celestine O. Siameh
2020 unpublished
South Africa has one of the world's most progressive tax systems, yet income inequality continues to be a major challenge for the country. Several fiscal policy initiatives have been implemented since the end of apartheid to reduce the high levels of inequality and poverty. Despite this, there has been no significant reduction in inequality in post-apartheid South Africa. Universal basic income (UBI) and better progressive taxation can be a new way to address the limited strength of fiscal
more » ... ngth of fiscal policies in South Africa. In developing countries, however, data on income is limited for the vast majority of the population working in the informal sector -informal labor is about 86% in Africa (ILO, 2018). Additionally, inclusion in the formal tax system is low. This paper compares the magnitude by which UBI versus targeted cash transfer (TCT) funded by progressive taxation can reduce income inequality in South Africa. Empirically, I conduct a policy simulation exercise to analyze how additional revenue generated from tax progressivity can be used to finance UBI and TCT, and to what extent this can reduce income inequality. Results show that both UBI and TCT reduce income inequality by more than 30% when these policies are accompanied and financed through a progressive taxation; however, UBI performs better in reducing inequality than TCT.
doi:10.22004/ag.econ.304571 fatcat:4w3uw4lmnvetzinjstklpflom4