## fmexs

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### Inequality, Growth, and Fiscal Redistribution
- Global inequality measured across all citizens of the world has been declining in recent decades, reflecting strong income growth in some large emerging market economies such as China and India.
- Income inequality within countries is mixed: income inequality has increased in most advanced economies, while inequality has declined in almost half the countries for which data are available.
- A key source of rising inequality has been technological change favoring higher skills.
- Economic growth has in many countries ensured that increases in inequality are compatible with improving living standards for households across all deciles of the income distribution, though inclusiveness varies across countries.
- Fiscal redistribution accounts for a substantial share of differences in inequality across groups and over time:
  - In advanced economies, direct taxes and transfers reduce income inequality on average by about one-third, with three-quarters of this reduction achieved through transfers.
  - In developing economies, fiscal redistribution is much more limited, reflecting lower and less progressive taxation and spending and greater reliance on regressive indirect taxes.

### Progressivity of Income Taxes and Transfers
- Progressive taxation and transfers are key components of efficient fiscal redistribution.
- Marginal income tax rates that increase with income can achieve greater progressivity.
- The appropriate combination of progressive tax and transfer instruments should reflect country-specific circumstances including administrative capacity, the performance of the existing safety net, underlying fiscal pressures, and social preferences.

### Progressivity at the Top
- Optimal tax theory suggests significantly higher marginal tax rates on top income earners than current rates, which have been on a declining trend.
- Empirical results do not support the argument that current (non-excessive) levels of progressivity harm growth; advanced economies with relatively low progressivity in their personal income tax (PIT) may have scope to raise top marginal tax rates without hampering economic growth.
- Policy options and considerations:
  - Consider different types of wealth taxes.
  - Emphasize reducing opportunities for tax evasion and avoidance.
  - Taxes on real estate or land are equitable and efficient and remain underused, though they may require sizable investment in administrative infrastructure, particularly in low-income developing countries.
  - Emerging markets and low-income developing countries should focus on gradually expanding PIT coverage and raising indirect taxes—including excise taxes on luxury goods and consumption items that generate negative externalities, such as fossil-fuel-based energy, alcohol, and tobacco—to generate funding for progressive spending.

### … and at the Bottom (Universal Basic Income, UBI)
- The UBI is an identical transfer to the entire population; several countries are experimenting with different forms, but no country has yet adopted a UBI that covers its entire population.
- Arguments for UBI:
  - Can address poverty and inequality more effectively than means-tested programs when information constraints, high administrative costs, and low take-up limit targeted benefits.
  - Proposed as a response to income decline and uncertainty from technological change (automation) and as a way to build support for structural reforms.
- Arguments against UBI:
  - Universality implies leakage of benefits to higher-income groups.
  - High fiscal cost raises affordability concerns and the risk of crowding out other high-priority spending that promotes inclusive growth.
  - Delinking income from labor force participation is seen as problematic by some opponents.
- Suitability depends on existing systems and administrative capacity:
  - In developing economies with sparse benefit systems and low coverage, a UBI may be an option to strengthen safety nets in the short term, but would need financing through efficient and equitable tax increases or cuts in spending (such as eliminating universal price subsidies or broadening the consumption tax base, including taxes on consumption with negative externalities).
  - In systems with generous benefits, broad coverage, and high progressivity, replacing existing systems with a UBI would likely result in substantial decreases in benefits for many lower-income households; priority should be given to strengthening existing systems (closing coverage gaps, addressing incomplete take-up) and designing wage subsidies for low-income workers.
- Fiscal and distributional implications (illustrative):
  - If a UBI were set at 25 percent of median per capita income, the fiscal cost would be about 6−7 percent of GDP in advanced economies and 3−4 percent in emerging markets and developing economies.
  - The impact on inequality, before financing, would be substantial: one measure of inequality, the Gini coefficient, would decrease on average by five points.
  - The reduction in poverty in emerging markets and developing economies would also be significant.
  - The net redistributive impact of a UBI depends on financing; the Fiscal Monitor analyzes a UBI with microsimulation methods and a general equilibrium model to account for behavioral responses, financing, and the equity–efficiency trade-off.

### Addressing Inequalities in Education and Health
- Investments in education and health can reduce income inequality over the medium term, address persistence of poverty across generations, enhance social mobility, and promote sustained inclusive growth.
- Significant gaps remain:
  - Sizable enrollment gaps between socioeconomic groups persist across almost the entire developing world.
  - Even when disadvantaged students are enrolled, they have substantially poorer learning outcomes than more affluent peers, reflecting low-quality education.
  - Disparities in health outcomes are not narrowing in many countries:
    - In advanced economies, the gap in life expectancy between males with tertiary education and those with secondary education or less ranges from about four to fourteen years and has widened in some countries.
    - The ratio of the infant mortality rate in the top socioeconomic quintile to that in the bottom quintile has increased in about half of emerging markets and developing countries, mostly reflecting slower improvements among the disadvantaged.
  - Gaps in health coverage remain in some emerging market economies and many low-income countries.
  - Health outcomes are increasingly determined by factors other than health care, including nutrition, education, and healthy behaviors, particularly in advanced economies.
- Policy implication:
  - Better targeting of public spending to disadvantaged groups to improve access to quality education and health care would both reduce inequalities and enhance overall efficiency.

*International Monetary Fund | October 2017*

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_Source: https://www.imf.org/-/media/files/publications/fiscal-monitor/2017/october/pdf/fmexs.pdf_