Looking first at the graphical results, direct taxes appear progressive in each country as average tax rates increase at higher income deciles, though to differing degrees.<sup>23</sup> That said, Honduras appears arguably only slightly progressive as even the top deciles pay very little tax. More generally, the graphs highlight clearly two points about the PIT in many developing countries: the PIT is paid predominantly by high income households, and the overall levels of taxation are low. For example, in Uganda, only the top three income deciles pay any significant amount of tax. The overall low levels of taxation are evident when compared to the United States, where average tax rates are significantly higher right across the income distribution, and even lower decile household pay significant levels of tax.

While the graphs provide a broad indication that direct taxes in these countries are progressive, the Kakwani index enables the degree of progressivity in each country to be assessed and compared. Among the IDA countries, Tanzania and Uganda are shown to have the highest degrees of progressivity, driven by the substantially higher tax burdens on the top decile and minimal tax burdens elsewhere. The lowest degree of progressivity amongst IDA countries is in Honduras where the top six deciles pay very low levels of tax, and the bottom four deciles pay virtually no tax. Interestingly, though, the degree of progressivity in Honduras is still slightly higher than in the United States.

The Reynolds-Smolensky index results provide further insight. While direct taxes in the United States exhibit less progressivity than in the IDA countries, they achieve significantly more redistribution. The reason for this is shown clearly by the average tax rate in the United States which is vastly greater than in any IDA country. In contrast, Uganda, which has the second most progressive tax system, achieves the lowest degree of redistribution because the average tax rate is extremely low.

More generally, the decomposition of the redistributive effect into its progressivity and average tax rate components shows that a highly progressive system on its own is not sufficient to achieve a significant reduction in inequality. It also illustrates that countries can take different approaches to achieve the same degree of redistribution. Consider, for example, Ghana and Uganda which both achieve almost the same degree of redistribution. Uganda achieves this through a highly progressive system that targets only the highest income households, whereas Ghana achieves the same redistribution through a less progressive system applying positive tax rates across most of the income distribution.

# 2.3.2 VAT

Effective progressivity studies can also be undertaken for the VAT if detailed household budget survey (HBS) microdata is available covering a wide range of consumption items (so as to enable modelling of multi-rate VAT structures). While VAT studies have been undertaken for many high-income countries (see, e.g., Thomas, 2022 and 2020, for 27 OECD countries; IFS, 2011, for 9 European countries), as with direct taxes, the data requirements mean that studies for IDA countries are not common.

Furthermore, a range of conceptual modelling difficulties are associated with modelling VAT burdens. In particular, many studies of the distributional impact of the VAT have examined the VAT burdens across 23 A close examination of the results shows some local regressivity in Ethiopia (1st-2nd decile) and Honduras (5th-6th decile). This could be due to the provision of direct transfers incorporated in the CEQ analysis, but potentially also due to measurement or sampling error. While the overall trend in these countries still appears progressive, this also highlights the usefulness of global metrics in providing a framework to weight the regressivity in one party of the distribution against progressivity elsewhere to generate an overall measure. This becomes particularly relevant for analysis of the VAT where effective tax burdens can fluctuate non-monotonically across the income and expenditure distribution.

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