Fiscal Policy and Income Inequality...Fiscal Policy and Income Inequality Francesca Bastagli –...
Transcript of Fiscal Policy and Income Inequality...Fiscal Policy and Income Inequality Francesca Bastagli –...
Fiscal Policy and Income Inequality
Francesca Bastagli – Overseas Development Institute
Taxation & Developing Countries (a PEAKS training course)
16 September 2013
Overview
• Trends in income inequality
• The impact of direct taxes and transfers
• Revenue and spending comparisons: Levels and composition
• Policy implications
• What are the key policy challenges in low-income countries?
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Inequality Trends
Trends
• Income inequality is increasing in many countries.
Does this matter?
• Intrinsic value
If existing income inequality is perceived as the outcome of unfair processes and unequal access to opportunities.
• Instrumental value
Can help to reduce inequality in other dimensions that matter (social, political, economic), promote progress in poverty reduction and growth.
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Inequality Trends
Source: Bastagli, Coady and Gupta (2012)
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Inequality Trends
• High-income countries: in most countries inequality started increasing in the 1980s and through the mid-1990s.
• Eastern Europe: between the late 1980s and mid-1990s inequality increased in most transition countries and has followed mixed trends since then.
• Latin America and the Caribbean: region with the highest income inequality; most countries experienced an increase in income inequality during the 1980s and until the 2000s; from then inequality has declined in most countries. Levels in 2006 close to those of the early 1990s; more recently continued decline.
• Sub-Saharan Africa: mixed trends in expenditure inequality; decreased in 4 out of 6 countries for which data are available in 1980s-1990s; little change in countries for which data are available in the late 1990s.
• Asia and the Pacific: from the mid-1990s to 2007, inequality increased in 14 countries and decreased in 8 countries.
• Middle East and North Africa: inequality increased in 9 of 12 countries in the region between 1990 and 2005.
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Inequality Trends
• Also striking, the difference in inequality between higher-income and developing countries:
Average inequality in the two most unequal regions (Latin America and Sub-Saharan Africa) exceeded a Gini of 0.45 every year. In the two most equal regions (Eastern Europe and High-income OECD countries) was less than 0.34. A difference of 11 percentage points.
Income inequality in Norway: 0.25 and Sweden: 0.26, in Brazil: 0.54 and South Africa: 0.65 (late 2000s).
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Impact of Direct Taxes and Transfers
• Income inequality was reduced by one-third in OECD countries (Source: OECD, 2011)
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0
0.1
0.2
0.3
0.4
0.5
0.6
Italy
Portu
gal
Germ
any
Unite
d St
ates
Fran
ce
Luxe
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Austr
ia
Polan
d
Belgi
um
Austr
alia
Finlan
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Japa
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Unite
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New
Zeala
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Czec
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Cana
da
Swed
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Neth
erlan
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Slova
k Rep
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Denm
ark
Norw
ay
Switz
erlan
d
Icelan
d
Kore
a
Gini
coef
ficie
nt
Gross income Disposable income
Impact of Direct Taxes and Transfers
• Income inequality was reduced by 2 percentage points on average in LAC countries (Source: Elaboration from Lustig et al, 2012)
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0.573 0.549
0.504 0.503 0.542 0.532
0.494 0.465
0
0.1
0.2
0.3
0.4
0.5
0.6
Brazil Mexico Peru Argentina
Market income Disposable income
Impact of Direct Taxes and Transfers
• Non-MT transfers, MT benefits, personal taxes and social insurance contributions (Source: Paulus et al, 2009)
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0.05
0.10
0.15
0.20
0.25
0.30
Ch
an
ge i
n G
ini
co
eff
icie
nt
non means-testedbenef its
means-testedbenef its
personaltaxes
social insurancecontributions
Limited Scope For Generalisations, However…
• The redistributive effect is on average larger for non-means-tested benefits, followed by personal taxes and M-T benefits.
• In-kind transfers (e.g., education and health) also reduce inequality (nearly 5pp on average).
• Equalising impact of personal income taxes, which fall more heavily on higher income groups.
• Indirect taxes tend to be regressive; e.g. consumption taxes have a significant regressive impact in OECD countries.
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Impact of Policy in Developing Countries is
Limited… by Low Revenue
Source: Bastagli, Coady and Gupta (2012)
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0
5
10
15
20
25
30
35
40
Advanced Emerging Europe
Latin America
Middle East and North
Africa
Asia and Pacif ic
Sub-Saharan Africa
Perc
en
t o
f G
DP
Tax,2010 or latest
Indirect Income Corporate Property
Impact of Policy in Developing Countries is
Limited… by Low Spending
Source: Bastagli, Coady and Gupta (2012)
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0
5
10
15
20
25
30
Advanced Emerging Europe
Latin America
Middle East and North
Africa
Asia and Pacif ic
Sub-Saharan Africa
Perc
en
t o
f G
DP
Social Spending,2010 or latest
Transfers Health Education
Also Limited By the Composition of Policy
• Heavy reliance on indirect taxes (in many cases regressive since exempt items are not those disproportionately purchased by the poor).
• Narrow income tax base (high “informality”, non-compliance, preferential treatment of capital and other incomes).
• Social insurance benefits restricted to formal sector (tend to be regressive).
• Social assistance spending often low and/or poorly targeted (e.g. universal price subsidies).
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In Kind Transfers are Also Often Regressive
Source: Bastagli, Coady and Gupta (2012)
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0
10
20
30
40
50
60
70
80N
am
ibia
20
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20
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Ko
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20
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Za
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9
Education
In Kind Transfers are Also Often Regressive
Source: Bastagli, Coady and Gupta (2012)
15
0
10
20
30
40
50
60
70
80A
rgen
tina
2009
Sou
th A
fric
a 20
00
Bra
zil 2
009
Bol
ivia
200
7
Egy
pt 2
005
Bel
arus
200
2
Hon
dura
s 20
04
Mex
ico
2008
Mon
golia
199
5
Ban
glad
esh
2000
Zam
bia
2009
Turk
ey 2
003
Moz
ambi
que
1997
Bul
garia
199
5
Thai
land
200
8
Rom
ania
199
7
Gha
na 1
998
Indi
a 19
96
Ecu
ador
199
8
Gua
tem
ala
2006
Health
Policy Implications: Enhancing the
Redistributive Role of Policy
• Strengthening resource mobilization capacity
– Expansion of progressive tax policy instruments – Expansion of corporate and personal income tax
bases through reducing exemptions, closing loopholes, and improving tax compliance
– Employment formalization and social insurance expansion
– Improvement in administrative capacity
• Higher spending with elements of targeting
– Expansion and improved targeting of social assistance (eliminate universal price subsidies)
– Expansion of health and education
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Policy Implications and Follow-up Issues
• Inequality is increasing in most countries and taxes and transfers are an important set of instruments governments can use to address it.
• Taxes and transfers should be considered jointly.
• General conclusions with respect to particular taxes are quite hard to find – progressivity/regressivity conclusions are country-specific and design details matter.
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