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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?
2
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.
3
Inequality Trends
Source: Bastagli, Coady and Gupta (2012)
4
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.
5
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).
6
Impact of Direct Taxes and Transfers
• Income inequality was reduced by one-third in OECD countries (Source: OECD, 2011)
7
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
mbo
urg
Austr
ia
Polan
d
Belgi
um
Austr
alia
Finlan
d
Japa
n
Unite
d Ki
ngdo
m
New
Zeala
nd
Czec
h Rep
ublic
Cana
da
Swed
en
Neth
erlan
ds
Slova
k Rep
ublic
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)
8
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)
9
0.00
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.
10
Impact of Policy in Developing Countries is
Limited… by Low Revenue
Source: Bastagli, Coady and Gupta (2012)
11
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)
12
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).
13
In Kind Transfers are Also Often Regressive
Source: Bastagli, Coady and Gupta (2012)
14
0
10
20
30
40
50
60
70
80N
am
ibia
20
03
Le
soth
o 2
00
2S
ou
th A
fric
a 2
00
0A
rge
ntin
a 2
00
9B
razi
l 20
09
Pe
ru 2
00
9M
exi
co 2
00
8A
lba
nia
20
02
Bo
snia
&H
erz
20
01
Ke
nya
20
06
Co
sta
Ric
a 2
00
1C
am
bo
dia
20
02
Tu
rke
y 2
00
1A
zerb
aija
n 2
00
1L
ibe
ria
20
08
Ko
sovo
20
00
Th
aila
nd
20
08
Ne
pa
l 20
04
Bo
livia
20
07
Uzb
eki
sta
n 2
00
0C
ote
d'Iv
oir
e 2
00
8B
en
in 2
00
3M
oza
mb
iqu
e 2
00
3E
gyp
t 20
05
Ug
an
da
20
06
Ba
ng
lad
esh
20
00
Za
mb
ia 2
00
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
16
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.
17
Overseas Development Institute
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www.odi.org.uk