Combating Inequality and Poverty in the United Republic of Tanzania: Policy Analysis and Options

Tanzania’s poverty rate remains high, and income inequality is increasing. This report analyses the trends in poverty and inequality and examines some of the potential explanations for the different growth patterns. The report goes on to examine four policy-areas that have a direct impact on the reduction of poverty and inequality, and makes recommendations on how to strengthen their impact. The four policy-areas are tax policy, social protection, agriculture and gender equality. The report examines different possible explanations for the change in the growth elasticities of poverty and inequality, including external shocks, public services expansion, changes in the sectoral distribution of growth and the role of official development assistance as well as measurement error. It finds that the changing composition of growth, especially the slowdown in the growth of agriculture, is likely to explain a part of the shift in the growth elasticity of poverty, while more research is needed to fully account for the changes in inequality. The report then considers four policy areas, where reforms could bring progress to reduce poverty and inequality in the short- to medium-term. The tax system is progressive and already makes a significant contribution to reducing income inequality. However, Tanzania collects less tax revenue than its peers, and some of its excise taxes disproportionately hurt the poor. To strengthen the inequality- and poverty reducing impact of the tax system, Tanzania could consider reducing exemptions on the Corporate Income Tax and expanding the use of the property tax. Tanzania could also consider the introduction of a wealth tax, and broaden the tax-base by lowering the threshold for VAT. The revenue collected should then be spent on targeted pro-poor interventions.