The reduction of poverty, and more recently inequality, are pressing concerns in many
low- and middle-income countries, not in the least as a result of the Sustainable Development
Goals committing countries to significant improvements by 2030. Redistribution is important for
reaching these goals, and is shaped by countries’ tax and welfare systems. Despite redistribution
resulting from the simultaneous effect of revenue collection and public expenditures, policies
and analyses of their distributional effects have largely been undertaken from narrow and
singular perspectives. In this paper, we aim to jointly assess the distributional effect of taxes and
transfers (through social protection) using Ethiopia as a case study. We find that currently
Ethiopia’s flagship social protection programme is more effective than income taxation in
achieving poverty reduction, while neither policy achieves a sizeable reduction in overall
inequality. Overall, our findings provide support for the common belief that social spending is
more suitable than taxation to achieve redistribution. We also assessed whether Ethiopia would
have the capacity to achieve the desired level of redistribution by applying higher marginal rates
on relatively high incomes. Our results suggest that Ethiopia does not currently have the capacity
to close the poverty gap, or to fully fund its main safety net programme using domestic income
sources alone.