Redistributive Implications of
Fiscal Policy
Income Redistribution or Poverty
Alleviation
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Scheme of Presentation
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Introduction
Concept of equity in fiscal policy
Redistributive effects of tax policy
Progressivity of expenditures
Income Redistribution versus poverty alleviation
Pro-poor expenditures: some counter-intuitive
findings.
• Concluding remarks
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Introduction
• Evolution of concept of equity in tax policy
• Horizontal and vertical equity concepts.
Uneasy case for progressive taxation
• Limited effectiveness of tax/expenditure
policy on redistribution
• Calibration of equitable fiscal policy- need
to shift emphasis to human development
and poverty alleviation
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Concept of Equity in Tax Policy
• Emphasis on vertical equity-achieving more equal
distribution of incomes;
• High and differentiated tax rates
• Developed countries: differentiation of direct taxes
• Developing countries: differentiation in indirect
taxes.
• Transitional economies: administered prices
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Redistributive Effects of Tax Policy
• Pechman - Okhner Study for US
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Conclusion- US Tax system is not significantly progressive
Tax burden - 25% of family income
Top decile reduction 2.06 percentage points
Improvement in the lowest decile 0.12 percentage point.
Gini coefficient:
– Most progressive:
– Least progressive:
0.4367
0.4252
0.4158
0.4240
– Effective tax rate:
– MP
– LP
21.9%
28.2%
25.3%
23.3%
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Effectiv e Tax Rates in United States
30
L e a st P ro g re ssi v e A ssu m p ti o n
25
M o st P ro g re ssi v e A ssu m p ti o n
20
15
10
5
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Income P e rce ntage
T ax R e v e nue /H ouse hold
Central,State and Local taxes
Redistributive Effects of Tax
Policy
• Progressivity of Tax System in Chile
– tax System close to proportional
– Gini coefficient moderative regressive.
– Insensitivity of income distribution to the tax
system.
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E ffectiv e T ax R ates in U nited S tates
T ax P rogressiv ity in C hile
16
14
12
10
8
6
4
2
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D e c ile s
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Gro u p In co m e
T axes as P ercen tag e o f
18
Progressivity of Expenditures
• Transfers have bigger influence than taxes
in redistribution.
• Distribution of incomes is quite insensitive
to both tax and expenditures.
• Chile’s case distribution of transfers
progressive 37.5% poorest quintile 28.1%
next quintile; 3.2% richest quintile.
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Political Economy of
Government Budgets
• Neither tax nor expenditure system is likely to alter
basic pattern of income distribution
• Attempts to modify income distribution was
fashionable half a century ago.
• Confiscatory tax rates: India 92%; US 95%; UK 91%.
• Efficient tax system: optimal taxation
• Expenditure has greater potential: public education and
medical care. Middle income groups also benefit and
access higher education better.
• Income distribution changes achieved is not much
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Political Economy of
Redistribution
• Role of education in redistribution socioeconomic mobility, demographic
transition, targeting, productivity,
• Should the governments bother to
redistribute?
– Calibrating non-regressive taxes
– Incidence assumptions- corporation tax
• More desirable option: reducing poverty.
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Returns to Rural Investments in India
Expenditure
R&D
Irrigation
Roads
Education
Power
Soil and water conservation
Health
Anti-poverty programss
Returns in Rs per No. of poor reduced
Rupee spending
per Mn. Rs
13.45
84.5
1.36
9.7
5.31
123.8
1.39
41
0.26
3.8
0.96
22.6
0.84
25.5
1.09
17.8
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Returns to Rural Investment in China
Returns to
Ag GDP
R&D
Irrigation
Roads
Education
Electricity
Telephone
Coastal
Central
Western
Average
Yuan per Yuan Expenditure
8.6
2.39
1.67
3.53
0.55
1.58
10.02
1.75
3.84
3.66
0.63
2.64
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12.69
1.56
1.92
3.28
0.4
1.99
9.59
1.88
2.12
3.71
0.54
1.91
Returns to Rural Investment in China
Returns to
Ag GDP
R&D
Irrigation
Roads
Education
Electricity
Telephone
Poverty
loan
Coastal
Central
Western
Average
No. of poor reduced per 10000 Yuan expenditure
1.99
0.55
0.83
2.73
0.76
0.6
0.88
4.4
0.77
3.61
5.38
1.65
1.9
0.75
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33.12
4.06
10.73
28.66
6.17
8.51
1.49
6.79
1.33
3.22
8.8
2.27
2.21
1.13
Concluding Remarks
• Equity in fiscal policy: Shift of emphasis from “reducing the incomes
of the rich” to “increasing the incomes of the poor”.
• Progressive rate schedule need not necessarily result in an equitable
tax system
• Income redistribution better achieved through expenditure side
• Shift of emphasis from income redistribution to poverty alleviation.
• Need to avoid regressive tax policies to finance anti poverty
interventions.
• Direct spending on anti-poverty interventions is not necessarily the
most efficient way of reducing poverty.
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