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Abstract
The principles of horizontal and vertical equity are central in fiscal policy. The
distributional implications of a taxation system are derived from how the tax codes
incorporate these principles for a given pattern of income distribution. This paper
examines the distributional issues and implications of personal income tax reforms
in Ethiopia with reference to the civil service sector. The theoretical issues and
policies are analyzed in light of the 1994 and 2002 income tax reforms. We argue
that whereas the reform measures undertaken so far have addressed some problems in the fiscal system, further measures are needed to improve the capacity of the tax code to promote the principles of equity and to encourage capital accumulation and growth efforts. The built-in structure of the tax system, coupled with conventional approaches in tax policy design and implementation, has
contributed towards policy stances that weaken the role that the tax system could
play in promoting sustainable economic growth and address problems of chronic poverty.