## A comprehensive mix of fiscal policies can curb inequalities at every stage where they emerge ## Source details **Canonical URL:** [A comprehensive mix of fiscal policies can curb inequalities at every stage where they emerge](https://www.imf.org/-/media/files/publications/fandd/article/2022/march/amaglobeli.pdf) ## Other formats - [Markdown version](/-/media/files/publications/fandd/article/2022/march/amaglobeli.pdf.md) - [Structured JSON version](/-/media/files/publications/fandd/article/2022/march/amaglobeli.pdf.json) --- ### Overview - The COVID-19 pandemic appears likely to worsen inequalities in an enduring way, further widening the gap between haves and have-nots in advanced economies and reversing progress in developing economies. - Many low-skilled workers, young people, and women have lost income and job opportunities. - The pandemic has accelerated long-term trends—automation and digitalization—that could make many jobs obsolete. - Massive disruptions in learning threaten long-lasting scars on opportunities for today’s youth. - Unequal access to vaccines and lagging recoveries put low-income countries further behind. - Various aspects of inequality—in income, wealth, educational attainment, gender, health, opportunities—are closely related and mutually reinforcing. ### Predistribution and redistribution: the need for a comprehensive approach - Policies must focus both on market income (predistribution) and disposable income after redistribution through taxes and transfers. - Predistributive public policies—such as public education and access to basic public infrastructure, basic health services, and social investments—help ensure an equal playing field before people enter the labor market. - Public intervention through social transfers and taxes is needed to help people cope with unemployment, aging, family, disability, or sickness. - Countries that spend more on social sectors (including education, health, and social protection) and have more redistributive tax systems tend to be more successful on average in reducing inequality. ### Opportunities and incentives (public spending and labor-market design) - Public spending can partly compensate for gaps in private spending on children, increasing intergenerational mobility and enhancing long-term growth by increasing education levels among disadvantaged children. - The type of spending needs careful assessment given country-specific circumstances (for example, higher education spending might benefit mostly richer households). - Fiscal instruments that influence incentives and participation: - Labor tax wedges and participation tax rates affect labor supply and employment, especially for second earners. - Refundable tax credits for low-income families, individualization of personal income tax filing, and more widely available and affordable childcare can reduce gender bias and encourage labor force participation. - Conditional cash transfers can reduce poverty and incentivize school attendance or regular health checkups. - Active labor market policies (public employment services, vocational training) support efficient functioning of labor markets. - Worker retention programs (used extensively in advanced economies during the recent crisis) help maintain employment linkages and contribute to smoother recoveries. ### Redistribution: taxes, transfers, and their effects - Direct taxes and transfers jointly reduce income inequality by more than one-third in advanced economies. - In emerging market economies the extent of redistribution is much smaller. - Overall redistribution accounts for 85 percent of the disposable income inequality between advanced and emerging market and developing economies. - Social transfers reduce inequality mostly at the bottom; taxation reduces inequality at the top. - Most redistribution is achieved through social transfers—social assistance, unemployment insurance, or pensions. - Effectiveness of social transfers depends more on coverage of the most vulnerable groups and adequacy of benefits than on aggregate spending levels. - Well-targeted transfers can support vulnerable groups while keeping costs manageable; digitalization can improve identification, verification, coverage, and targeting, and reduce leakages from fraud, corruption, or errors. ### Tax policy, administration, and revenue mobilization - More progressive taxation and mobilizing revenues to finance social spending have large potential to reduce inequality, especially where taxation is low in burden and progressivity. - Measures to increase redistributive capacity of tax systems include: - Higher top marginal income tax rates. - (In-work) tax credits for low-income households. - Limiting loopholes in taxation of capital income (dividends, interest, and capital gains). - Indirect taxes (value-added tax and excises) are major revenue sources and relatively easy to enforce; although potentially regressive, they can support equity objectives if revenues finance basic public services that proportionally benefit poor households. - Significantly raising revenues from direct taxes requires strong governance reforms and use of digitalization opportunities: - Real-time data on household expenditures can facilitate progressive taxation of consumption. - International registers for asset ownership and greater transparency create additional revenue opportunities. - Tax administration reforms can generate resources for higher spending on health, education, and social protection. ### Navigating fiscal trade-offs and medium-term strategies - Fiscal policy implies trade-offs under tight budget constraints; the current crisis increased these trade-offs. - Fiscal support during the crisis helped maintain livelihoods and contributed to recovery but led to unprecedentedly high debt levels in advanced economies; many low-income developing countries face high risks of debt distress. - Given debt vulnerabilities, many countries will need medium-term policies to bring deficits sustainably down while addressing rising spending pressures from population aging, climate change, and acceleration of digitalization. - Governments can navigate trade-offs through appropriate policy design anchored in credible medium-term fiscal strategies. - Experience with IMF-supported programs shows it is possible to implement fiscal adjustment while mitigating negative impacts on vulnerable groups. - Possible country-specific measures include: - Structural pension and health care reforms for countries with significant fiscal pressures from aging populations. - Eliminating wasteful subsidies and improving efficiency of spending on public investments and goods and services. - Broadening tax bases and strengthening administrative capacities to boost revenues. *David Amaglobeli and Celine Thevenot, Finance & Development, March 2022.* --- _Source: https://www.imf.org/-/media/files/publications/fandd/article/2022/march/amaglobeli.pdf_