Distributional Consequences of Transport Fuel Taxes in Ethiopia

This is a chapter in a book entitled "Fuel Tax and the Poor: The Distributional Effects of Gasoline Taxation and Their Implications for Climate Policy" edited by Thomas Sterner, 2011.

Some taxes are progressive while others are regressive or neutral.  Taxes on goods such as fossil fuels are important for a variety of reasons including generation of revenue for government, contribution to emission abatement and saving of foreign exchange from reduced imports. Hence, in this chapter, we investigate the distributional effects of private (direct), public (indirect) and combined fossil fuel use in different expenditure groups of households. To examine whether fuel taxes are regressive or not, we use total expenditure rather than annual income, which is a way of approximating lifetime income. Suits coefficients are calculated in order to compare the degree of regressively/progressivity. We also report tax burden from private (direct) consumption, public (indirect) consumption and direct consumption and indirect consumption combined. Our results suggest that fuel taxes are progressive rather than regressive. We also find that fuel taxes are less progressive for public transport than for private transport. In all scenarios, the burden is the largest in the last decile (highest expenditure category). This result implies that higher taxes will have more impact on the categories with the highest expenditure and hence are pro-poor.