Low-Income Countries Seminar Income Inequality and Fiscal ... · Background Income inequality has increased in most advanced and many developing economies over recent decades Emphasis

Income Inequality and Fiscal Policy

in Low-Income Countries

Sanjeev Gupta

Fiscal Affairs Department

International Monetary Fund

March 15, 2013

Low-Income Countries Seminar

Presentation is based on:

F. Bastagli, D. Coady, and S. Gupta, 2012, “Income

Inequality and Fiscal Policy”, IMF Staff Discussion

Note, SDN/12/08(Revised).

Available at:

http://www.imf.org/external/pubs/cat/longres.aspx?sk=

40024

2

http://www.imf.org/external/pubs/cat/longres.aspx?sk=40024

http://www.imf.org/external/pubs/cat/longres.aspx?sk=40024

Background

Income inequality has increased in most advanced

and many developing economies over recent

decades

Emphasis on inclusive growth has led to a

growing concern about income inequality in

developing countries (e.g., China and India)

So how can fiscal policy contribute to lowering

income inequality?

3

Plan of Presentation

I. Role of fiscal policy

II. Trends in income inequality

III. How has fiscal policy affected income inequality

in advanced economies?

IV. How effective has fiscal policy been at reducing

inequality in developing countries?

V. Lessons for the design of fiscal policy in

developing countries

4

I. Role of Fiscal Policy

5

I. Role of Fiscal Policy

Fiscal policy can affect income distribution

Directly. By reducing inequality of disposable incomes

compared to inequality of market incomes

Indirectly. Through impact on future earnings of individuals

and inequality of market incomes

Role likely to vary across countries reflecting range of

policy instruments available but also social

preferences towards equity and efficiency

But taxes and transfers may distort allocation of

resources (equity-efficiency trade-off)

6

II. Trends in income inequality

7

Trends in Disposable Income Inequality, 1980–2010

Income inequality is substantially higher in low-

income economies…..

0.20

0.25

0.30

0.35

0.40

0.45

0.50

0.55

1980 1985 1990 1995 2000 2005 2010

Gin

i coeff

icie

nt

Latin America and Caribbean Sub-Saharan Africa Middle East and North Africa

Asia and Pacific Emerging Europe Advanced

8

0

2

4

6

8

10

12

14

16

18

Ne

pal

Ch

ina

Sri L

anka

Indon

esia

La

o P

DR

Bang

lad

esh

Ca

mbo

dia

India

Vie

tnam

Mo

ngo

lia

Phili

ppin

es

Para

gu

ay

Ho

ndu

ras

Co

lom

bia

Vene

zu

ela

, R

B

Boliv

ia

Uru

guay

Co

sta

Ric

a

Arg

entina

Do

min

ican

Rep

ublic

Jam

aic

a

Gua

tem

ala

Turk

men

ista

n

Kyrg

yz R

ep

ublic

Uzbe

kis

tan

Tajik

ista

n

Djib

outi

Mo

rocco

Tun

isia

Ma

urita

nia

Egypt, A

rab R

ep.

Rw

anda

South

Afr

ica

Nig

er

Gha

na

Cô

te d

'Ivo

ire

Tan

za

nia

Mo

za

mb

iqu

e

Zam

bia

Ma

dag

asca

r

Buru

nd

i

Changes in Disposable Income Inequality Across Regions, 1990–2005

(Percentage-point change in Gini coefficient)

…..and has been increasing in many of these

Latin

America

Middle East

and North

Africa

Sub-Saharan

Africa Asia and

Pacific

9

0

5

10

15

20

25

Pe

rce

nt

United States United Kingdom

Australia Canada

South Africa India

0

5

10

15

20

25

Pe

rce

nt

France Germany

Japan Netherlands

Sweden

Gross Income Share of Top One-Percent in Selected Advanced

and Developing Economies, 1925–2010

More recently, the focus has been on the rising

income share of the top income groups

Source: World Top Incomes Database

10

III. How has fiscal policy

affected income inequality in

advanced economies?

11

0

0.1

0.2

0.3

0.4

0.5

0.6

0

0.1

0.2

0.3

0.4

0.5

0.6

Gross income Disposable income Gross income

In advanced economies, fiscal policy has

reduced income inequality by one-third ….

Source: OECD, 2008.

Redistributive impact in OECD countries, 2008

Gross income average = 0.45

12

0

0.1

0.2

0.3

0.4

0.5

0.6

0

0.1

0.2

0.3

0.4

0.5

0.6

Disposable income Gross income

In advanced economies, fiscal policy has

reduced income inequality by one-third ….

Source: OECD, 2008.

Redistributive impact in OECD countries, 2008

Gross income average = 0.45

Disposable income average = 0.30

13

…..with about two-thirds of this impact is

achieved on the expenditure side

Redistributive impact of tax and spending

Source: Paulus, 2009.

0.00

0.05

0.10

0.15

0.20

0.25

0.30

Cha

ng

e in

Gin

i co

eff

icie

nt

non means-testedbenefits

means-testedbenefits

personaltaxes

social insurancecontributions

Transfers = 0.10

Transfers and taxes = 0.15

14

Indirect taxes and in-kind transfers also influence

the redistributive impact of fiscal policy

Indirect taxes. Studies find that the value-added tax

(VAT) and excise duties are regressive in European

countries (O’Donoghue et al., 2004; Warren, 2008)

In-kind transfers. Spending on education, health care

and housing benefits decreased the Gini coefficient by

5.8 percentage points on average in 5 European

economies (Paulus et al., 2009)

15

Corporate income taxes may not be as

progressive as often assumed

The incidence of corporate taxes will tend to

fall on wages as capital is more mobile

However, taxation of “rents” (above normal

profits) is likely to fall on owners of capital

16

Diminishing Redistributive Impact of Fiscal Policy Since Mid-1990s

However, the redistributive impact of fiscal policy

has decreased since the mid-1990s

36.2

26.7

39.2

27.4

39.8

28.3

0

5

10

15

20

25

30

35

40

45

Market Income(left)

Disposable Income(left)

Gin

i coeff

icie

nt

mid-1980s mid-1990s mid-2000s

73.2

52.5

0

10

20

30

40

50

60

70

80

Fiscal Redistribution(right)

Perc

ent

Source: Immervoll and Richardson, 2011; OECD, 2011.

17

IV. How effective has fiscal

policy been at reducing

inequality in developing

countries?

18

Levels and Composition of Tax Revenues and Social Spending

Impact of fiscal policy in developing economies

is limited by low tax-spending levels…

0

5

10

15

20

25

30

35

40

Advanced EmergingEurope

LatinAmerica

MiddleEast and

NorthAfrica

Asia andPacific

Sub-Saharan

Africa

Pe

rce

nt o

f G

DP

Tax, 2010 or latest

Property

Corporate

Income

Indirect

0

5

10

15

20

25

30

Advanced EmergingEurope

MiddleEast and

NorthAfrica

LatinAmerica

Sub-Saharan

Africa

Asia andPacific

Pe

rce

nt o

f G

DP

Social Spending, 2010 or latest

Education

Health

Transfers

19

…..as well as less progressive taxes and transfer

programs

Greater reliance on indirect taxes and narrower tax

bases

Progressivity of direct taxation is weakened by tax

noncompliance and narrow tax bases

On the spending side, poor targeting limits the

redistributive capacity of transfer programs

20

8.6

1.7 1.6 0.9 0.6

0.0

4.6

3.0

1.8 3.3

1.1 1.6

13.2

4.7

3.4

4.1

1.8 1.6

0

2

4

6

8

10

12

14

MENA CEE-CIS Sub-Saharan Africa E.D. Asia LAC Advanced

Perc

ent

of

GD

P

Energy price subsides as a percentage of GDP

Pre-tax

Tax-

subsidies

Post-tax

21

Bottom quintile, 7.2

Second quintile, 11.4

Third quintile, 16.2

Fourth quintile, 22.5

Top quintile, 42.8

Fuel subsidies benefit upper income groups the

most…

22





Top quintile, 20.6

Kerosene



Third quintile,

9.7

Fourth quintile, 19.4 Top quintile,

61.3

Gasoline





Top quintile, 42.0

Diesel



Third quintile,

12.6


Top quintile, 53.8

LPG

…across all products

23

Fiscal policy accounts for nearly 3/4 of Europe

vs. Latin America Gini difference

Re-distributional impact: Europe vs. Latin America

0.23

0.17

0

0.05

0.1

0.15

0.2

0.25

Disposable gini difference

Fiscal impact

Right-side axis

0.52

0.46

0.5

0.27

Latin America Europe

0

0.1

0.2

0.3

0.4

0.5

0.6

Gross income Disposable income

Source: Goñi, López and Servén, 2008

24

Benefit Incidence of Education and Health Public Spending

(share of bottom 40 percent)

In-kind public spending has been found to be

regressive in many developing economies

0

10

20

30

40

50

60

70

Chile

(1996)

Rom

ania

(1997)

Arg

entin

a (

1993

)

Dom

inic

an R

epublic

…

Bu

lga

ria

(19

97)

Ma

law

i (1

997

)

Ma

cedonia

(1996)

Me

xic

o (

1996)

Pe

ru (

1994)

Mo

ngolia

(199

5)

Kyrg

yz R

epublic

(1

993)

Cote

d' Iv

oire (

1995)

Guyana

(199

3)

Pa

nam

a (

1997)

Ta

nzania

(1993)

So

uth

Afr

ica (

1993)

Mo

zam

biq

ue (

1996)

Ba

ngla

desh (

2000)

Ecuador

(1998)

Vie

tnam

(19

93)

Arm

enia

(1

996)

Ka

zakhsta

n

(1996)

Ma

dagascar

(1993)

Nepal (

1996)

Nic

ara

gua (1

993

)

Guin

ea (

1994)

Education Benefit Incidence for Bottom 40%

0

10

20

30

40

50

60

70

80

Arg

entin

a (

1993

)

Chile

(1992)

Colo

mb

ia (

19

92)

Costa

Ric

a (

1992)

Jam

aic

a (

1993)

Hondura

s (

1995)

Bra

zil

(1990)

Pe

ru (

1997)

Mo

ngolia

(199

5)

Ta

nzania

(1993)

Ba

ngla

desh (

2000)

So

uth

Afr

ica (

1993)

Eg

ypt (1

99

4)

Ke

nya (

1992)

Ma

dagascar

(1993)

Mo

zam

biq

ue (

1996)

Bu

lga

ria

(19

95)

Vie

tnam

(19

93)

Indonesia

(1990)

Rom

ania

(1997)

Ghana (

1998)

India

(19

96)

Ecuador

(1998)

Guin

ea (

1994)

Health Benefit Incidence for Bottom 40%

25

Conditional cash transfers

The recent expansion of “conditional cash transfer”

programs provides a promising approach for

enhancing the distributive power of public spending in

developing economies

The largest programs, in Brazil and Mexico, have reduced the

Gini by 2.7 percentage points (Soares et al., 2007)

However, these programs need to be targeted to the

poorest households

26

V. Lessons for the design of

fiscal policy in developing

countries

27

Lessons for the design of fiscal policy

In developing economies, the capability of fiscal

policy to address income inequality needs to be

enhanced

This requires improvements on two fronts:

The level of tax and spending needs to be

increased

The redistributive impact of tax and spending

needs to be improved

28

Enhancing role of tax policy

Strengthening resource mobilization capacity

Improvement in administrative capacity

Expansion of corporate and personal income tax

bases (addressing exemptions, loopholes, and tax

compliance)

Expansion of tax policy instruments (VAT plus

excises)

29

Enhancing role of public spending

Higher and better targeted spending

Expansion and improved targeting of social

assistance (eliminate universal price subsidies)

Expansion of health and education

Expansion of conditional cash transfers

30

THANK YOU

31

Change in Gini Coefficient, 1990 to 2005

ChangeLarge Increase

(Change ≥ 5)

Medium Increase

(3 ≤ Change < 5)

Small Increase

(0 < Change < 3)

Small Decrease

(-3 < Change < 0)

Medium Decrease

(-5 < Change ≤ -3)

Large Decrease

(Change ≤ -5)

Latin America

and Caribbean1990-2005

Colombia, Honduras,

Paraguay, Venezuela

Bolivia, Costa Rica,

Uruguay

Argentina, Dominican

Republic, Guatemala,

Jamaica

El Salvador,

Panama

Brazil, Chile, Ecuador,

Nicaragua, PeruBelize, Mexico

Sub-Saharan

Africa1990-2005

Cote d'Ivoire, Ghana, Niger,

Rwanda, South Africa

Mozambique,

Tanzania

Burundi, Madagascar,

Zambia

Cameroon,

Nigeria, UgandaGambia

Burkina Faso, Central

African Republic,

Ethiopia, Guinea,

Guinea-Bissau, Kenya,

Lesotho, Malawi, Mali,

Namibia, Senegal,

Swaziland

Asia and Pacific 1990-2005

China, Indonesia, Rep. of

Korea, Lao PDR, Nepal, Sri

Lanka

Bangladesh,

Cambodia, TaiwanIndia, Mongolia,

Philippines, Vietnam

Thailand Malaysia

Middle East

and North Africa1990-2005

Kyrgyz Republic, Tajikistan,

Turkmenistan, UzbekistanDjibouti

Egypt, Mauritania,

Morocco, TunisiaPakistan Iran, Jordan

32

Documents

Low-Income Countries Seminar Income Inequality and Fiscal ... · Background Income inequality has increased in most advanced and many developing economies over recent decades Emphasis