The Effect of Taxation on Income Inequality in Zambia

Abstract

This study examines the relationship between tax policy and income inequality in Zambia over the period from 1991 to 2024. Despite sustained economic growth driven by copper exports and expansion in construction and services, income inequality in Zambia has remained persistently high, with Gini index values ranging from 42.10 to 59.10 and a mean of 52.51, placing Zambia in the high-inequality category. Using annual time-series data from the Zambia Revenue Authority, Bank of Zambia, Zambia Statistics Agency, and World Bank publications, this study employs a semi-log multiple regression model to assess how three major tax instruments; Personal  Income Tax (PIT), Company Income Tax (CIT), and Value Added Tax (VAT) associated with income inequality as measured by the Gini index. The empirical results reveal a mixed distributional effect of Zambia's tax policy. Personal Income Tax exhibits a negative and statistically significant association with the Gini index (coefficient: -6.893, p < 0.01), consistent with the ability-to-pay principle and progressive taxation theory, suggesting that a 10% increase in PIT is associated with approximately a 0.66 percentage-point reduction in inequality. Conversely, Value Added Tax shows a positive and statistically significant association (coefficient: 6.723, p < 0.01), indicating that VAT is regressive and exacerbates income inequality – a finding consistent with literature on consumption taxes in developing countries. Company Income Tax demonstrates no statistically significant effect, reflecting challenges related to tax incentives, profit-shifting, informality, and uncertainty regarding ultimate tax incidence. The findings imply that Zambia cannot rely on revenue mobilisation alone as evidence of tax progressivity; the composition of taxation matters critically for equity outcomes. Policy recommendations include strengthening PIT progressivity and compliance, improving CIT enforcement while limiting distortionary incentives, and pairing VAT revenue with targeted social spending to protect lower-income households from regressive consumption taxes. Limitations include the exclusion of Customs and Excise Duty, potential multicollinearity among tax variables, and the use of nominal collections rather than real per-capita measures. Future research should incorporate household-level fiscal incidence analysis and social expenditure variables to establish stronger causal evidence.

Keywords: Company Income Tax, fiscal redistribution, Gini index, income inequality, Personal Income Tax, Value Added Tax, Zambia

DOI: 10.7176/RJFA/17-3-04

Publication date: July 30^th 2026