The Effect of Direct and indirect Taxes of Poverty in Developing Countries and their Regions: Panel Data Analysis

Over the past decades, most developing countries have not experienced significant poverty reduction. According to the Poverty and Shared Prosperity report 2020, COVID-19 can add around 27–40 million new poor in developing regions such as Sub-Saharan Africa. Several factors, such as the low level of tax revenue, may limit the expected effects of the tax system on poverty. In this paper, we examine the effect of direct and indirect taxes on poverty in developing countries and their regions. We used 37 developing countries and their regions from 1990 to 2021 due to the availability of the dataset. We use the Dynamic Common Correlated Effect Instrumental Variable (DCCE-IV) estimator to handle endogeneity, cross-sectional dependence, and heterogeneity issues. Our results reveal that direct and indirect taxes are insignificant in reducing poverty in developing countries. When we decompose our tax revenue, the results show that Taxes on goods and services (TGS) and corporate income tax (CIT) lead to poverty reduction in developing countries. It is observed that TGS shows a mean value of 10.5% that minimizes poverty, while we notice a minimizing mean-value of 3.1% for CIT. At the regional level, we found that PIT and CIT reduce poverty in three regions, while TGS reduces it in four regions. From our findings, we also found that CIT and TGS from these regions (EAP, LAC, and SSA) reduce developing countries’ poverty. Therefore, policymakers should encourage more tax revenue and expand access to education for poverty reduction in Developing countries and their regions.