## _sdn1208

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---

### Executive summary — purpose, scope, and fiscal policy channels
- Focus: how fiscal policy can address income inequality in both advanced and developing economies.
- Database: comprehensive database on disposable (post-tax-and-transfer) income inequality for 22 advanced and 128 developing economies.
- Fiscal policy channels:
  - Direct: effect on current disposable incomes.
  - Indirect: effect on future earnings capacities and market (pre-tax-and-transfer) incomes.
- Design considerations:
  - Redistributive tax-benefit systems can introduce economic inefficiencies as individuals and firms change behavior to avoid taxes or maximize transfers; efficiency costs typically increase with the extent of redistribution.
  - Importance of focusing on the overall tax and transfer system rather than on individual components.
- Stated scope: emphasis on what has been the redistributive impact of fiscal policy and how it can be enhanced.

### Trends in income inequality — measures and regional patterns
- Primary inequality measure: Gini coefficient (ranges between 0 and 1). Example: “For example, a Gini of 0.3 (or 30 percent) indicates that if two persons were chosen at random from the population, the expected difference between their incomes would be 60 percent of the mean income.”
- Supplementary measures: 90/10 and 80/20 percentiles and income-share ratios; correlation between extreme inequality measures and the Gini exceeds 0.9.
- Broad findings:
  - Income inequality has increased in most advanced and many developing economies over recent decades.
  - Differences in disposable income inequality across regions are considerably greater than changes in regional averages over time.
- Regional magnitudes and dynamics (selected exact figures and statements):
  - Between 1990 and 2005, average inequality in each region changed by less than 3 percentage points.
  - Two most unequal regions: Sub-Saharan Africa and Latin America — average inequality exceeded a Gini of 0.45 every year.
  - Two most equal regions: emerging Europe and advanced economies — average inequality was less than 0.33 (a difference of 12 percentage points).
  - Within-region variation:
    - Advanced and emerging Europe: inequality increased in nearly all economies; one-third of advanced economies and two-thirds of emerging Europe experienced increases exceeding 3 percentage points between 1990 and 2005.
    - Emerging Europe: inequality increased by more than 5 percentage points in half of economies, with most increases occurring between 1990 and 1995.
    - Latin America: over half of economies saw increased inequality between 1990 and 2005; inequality has recently started to decline there, with decreases observed in nearly all economies since 2000.
    - Asia and the Pacific: most economies experienced increases; two economies saw decreases in excess of 5 percentage points.
    - Sub-Saharan Africa: regional average inequality fell, but four countries saw increases of more than 3 percentage points.
    - Middle East and North Africa: average inequality stable; three economies saw increases over 3 percentage points (from relatively low initial inequality) and four economies saw decreases over 5 percentage points (from relatively high initial inequality), producing strong inequality convergence within the region.
- Concentration at the top:
  - Over the last three decades, pre-tax-and-transfer (market) income shares of the richest increased substantially in English-speaking advanced economies, and in India and China.
  - Much less increase in Southern European and Nordic economies; hardly any increase in continental Europe and Japan.

### Fiscal policy’s redistributive role — advanced economies
- Historical impact:
  - Fiscal policy has played a significant role in reducing income inequality in advanced economies, especially via expenditure (social benefits) and also through progressive income taxation.
  - Fiscal policy reduced the average Gini in 25 OECD countries by about one-third between 1985 and 2005, i.e., by around 15 percentage points (OECD, 2008, 2011a).
- 2005 country examples (redistributive reduction in Gini):
  - Around 20 or more points in: Belgium, Denmark, Germany, Italy, Luxembourg, Poland, and the Slovak Republic.
  - Less than 10 points in: Korea, Iceland, Ireland, Switzerland, and the United States.
- Relative roles of taxes and transfers:
  - On average, redistribution achieved by public cash transfers is twice as large as that achieved through taxes.
  - Exception: United States—taxes are more redistributive than transfers.
  - Non-means-tested transfers (public pensions and universal child benefits) account for much of expenditure-side redistribution in Nordic economies, Austria, Belgium, Poland, and Hungary.
  - Income taxes often achieve greater redistribution than means-tested transfers in most economies; United Kingdom and Ireland are exceptions.

### Changes over time and causes of declining redistributive impact
- Changes and magnitudes:
  - Between mid-1980s and mid-1990s:
    - Market income Gini increased by 3 percentage points.
    - Disposable income Gini increased by 0.8 points.
    - Decrease in inequality due to fiscal policy increased by 2.2 percentage points (from 9.5 to 11.7), offsetting 73 percent of the 3 percentage-point increase in market income inequality.
  - Over the two decades from mid-1980s to mid-2000s:
    - Fiscal policy offset a lower 53 percent of the increase in market income inequality.
- Attributed drivers:
  - Policy reforms since the mid-1990s that reduced generosity of social benefits (unemployment, social assistance) and reduced income tax rates, especially at higher income levels.
  - Behavioral responses, tax avoidance and evasion, and changes in top incomes.

### Efficiency–equity trade-offs, behavioral responses, and design options
- Work disincentives:
  - Means-tested benefit withdrawal as earnings increase creates significant work disincentives for low-skilled workers.
  - Immervoll and others (2007): transferring an additional euro from high- to low-income individuals through traditional means-tested programs can reduce the welfare of high-income individuals by 2 to 4 euros in most economies.
- Policy responses to reduce equity-efficiency trade-offs:
  - Introducing in-kind benefits linked to employment.
  - Expanding active labor market programs (tighter eligibility rules, intensified job search requirements, training).
  - These policies require substantial administrative capacity.
- Taxation of high incomes and behavioral evidence:
  - Progressive income tax schedules can create disincentives for higher-income earners; reductions in top tax rates in many economies during the 1980s were followed by relatively high income growth at the top.
  - Recent research (Piketty, Saez, and Stantcheva, 2011): absence of correlation between rising top incomes and per capita GDP growth suggests top income increases reflect rent-seeking rather than productivity increases, motivating calls for more progressive taxation of high-net-wealth individuals.
- Tax evasion and avoidance:
  - Opportunities for higher-income groups reduce revenue potential and redistributive impact and may shift remuneration toward stock options and capital gains.

### Indirect taxes, in-kind transfers, and corporate taxation
- Indirect taxes:
  - In 12 EU economies, the effective indirect tax rate (share of consumption taxes in total household income) is on average three times higher for the bottom income decile than for the top decile (O’Donoaghue, Baldini and Mantovani, 2004).
  - Both VAT and excise duties are regressive; excise taxes are especially regressive—their share in total income is four times higher in the bottom decile than in the top decile.
- In-kind transfers:
  - Public spending on education, health care, housing, and food transfers is highly redistributive.
  - In five European economies (Belgium, Germany, Greece, Italy, and the United Kingdom), in-kind transfers decreased the Gini coefficient by 5.8 percentage points, with health accounting for 3.6 points and education for 2.2 points (Paulus, Sutherland, and Tsakloglou, 2009).
- Corporate income taxes:
  - Long-run incidence depends on relative mobility of capital and labor.
  - Recent empirical evidence suggests between 45 and 75 percent of the corporate tax burden falls on wages (Gentry, 2007; Arulampalam, Devereux and Maffini, 2010).
  - Because wage earners typically have lower mean incomes than capital income recipients, corporate taxes may be less progressive than they appear.

### Developing economies — constraints and policy levers
- Fiscal capacity constraints:
  - Average tax ratios: advanced economies exceed 30 percent of GDP.
  - Ratios in developing economies (excluding emerging Europe) generally fall in the range 15–20 percent of GDP.
- Spending differences:
  - Lower spending, especially transfer spending in Asia and the Pacific and Sub-Saharan Africa, explains much of the weaker redistributive impact.
  - Example: almost three-quarters of the difference in disposable income inequality between Latin American economies and advanced economies can be explained by fiscal policy differences.
- Key reform areas:
  - Resource mobilization: broaden income and consumption tax bases; expand corporate and personal income taxes by reducing tax exemptions and improving compliance.
  - Expenditure reforms: reduce universal price subsidies; improve capacity to implement better targeted transfers; gradually expand social insurance systems.
  - Targeted programs: scale up conditional cash transfer programs; broaden public pension coverage where feasible.
- Distributional features and pitfalls highlighted for Latin America (Box 1):
  - Mid-2000s: tax and transfer system decreased average Gini in six Latin American economies by about 2 percentage points (from 0.52 to 0.50); a comparable set of 15 European economies saw a decrease of around 20 percentage points (from 0.46 to 0.27).
  - Tax collections in the region are below comparable-income economies by a median of 4 percentage points.
  - Social transfers in the six Latin American economies average 7.6 percent of GDP compared to 16.3 percent in the 15 European economies.
  - The richest 40 percent capture over 70 percent of social spending in Latin America.
  - In the early 2000s the share of the population above the legal retirement age in receipt of a pension in developing economies was, on average, around 40 percent, as compared to 90 percent in European economies.
  - Regressive universal price subsidies erode fiscal space.

### Fiscal consolidation — risks, mechanisms, and design guidance
- Concern: possible adverse impact of fiscal consolidations on low-income groups in some advanced and emerging economies.
- Two channels by which consolidation affects inequality (Box 1):
  1. Short-run macroeconomic effects: consolidation reduces output and increases unemployment, associated with a declining wage share and wider wage inequality.
  2. Policy composition effects: inequality increases more when adjustment relies on regressive taxes or cuts in progressive spending.
- Exact definition provided (Box 1): A large fiscal consolidation is defined as one that lasts at least three years, where the cyclically adjusted primary balance (CAPB) improves by at least 5 percent of GDP, and where the cumulative change in the CAPB is not reversed by more than 1 percentage point from one year to the next.
- Evidence and conditional guidance:
  - Advanced economies: episodes of large fiscal adjustment have been associated with sizeable increases in unemployment in the short term; protecting unemployment benefits and progressive social services can contain widening inequality; adjustments biased towards expenditure cuts have tended to exacerbate income inequality.
  - Developing economies: large fiscal adjustments have had relatively significant impacts on the real economy and unemployment, but increases in unemployment have typically been of shorter duration; because much government spending is not progressive, expenditure reductions concentrated in non-progressive areas can improve equity; revenue measures will likely be needed and adverse distributional effects can be mitigated by reforms that enhance tax efficiency and equity.
- Design guidance during consolidations:
  - Pursue consolidation measures that minimize harm to low-income and vulnerable groups by:
    - Protecting or enhancing redistributive spending targeted at the poor.
    - Implementing revenue measures that increase progressivity and reduce avoidance/evasion.
  - In developing economies, consolidate while improving targeting and efficiency of spending and broadening tax bases.

### Policy recommendations — packages to reconcile redistribution and efficiency
- General policy package (repeated across sections and boxes):
  - Reduce tax evasion and avoidance.
  - Increase progressivity of income taxes at higher brackets.
  - Cut unproductive expenditures.
  - Expand means-tested programs.
- Advanced economies — short and medium term:
  - Short term:
    - Protect the most redistributive social benefits (including unemployment benefits) until economic recovery reduces unemployment.
    - Expand active labor market programs (job-search support, targeted wage subsidies, training programs).
  - Medium term:
    - Greater reliance on progressive revenue measures can reduce the need for deep cuts in social transfers, subject to existing tax levels.
    - Remove opportunities for tax avoidance and evasion.
    - Increase reliance on progressive wealth and property taxes.
    - Broaden expenditure reform to include military spending, subsidies (including tax expenditures), and public-sector wages.
- Developing economies — tax and expenditure priorities:
  - Tax side:
    - Short-term focus on broadening income and consumption tax bases.
    - Expand corporate and personal income tax bases by reducing tax exemptions, closing loopholes, and improving tax compliance.
    - Expand the consumption tax base (e.g., broader adoption of value-added tax); design consumption taxes to mitigate distributional impacts (appropriate treatment of small businesses and excises on luxury goods).
  - Expenditure side:
    - Rely more on targeted social expenditures to protect households from poverty and to improve education and health outcomes for disadvantaged households.
    - Eliminate fiscally costly and inefficient universal price subsidies (including tax expenditures) to generate resources in the short term.
    - Scale up conditional cash transfer programs as part of social protection strategies.
    - Broaden coverage of public pension systems; where constrained, consider greater use of targeted social pensions.

### Empirical highlights, data construction, and representative statistics
- Top wealth and income concentration:
  - "0.5 percent of the global population accounting for more than 35 percent of total global wealth" (Credit Suisse Research Institute, 2010).
  - United States selected shares reported:
    - Share of market income captured by the richest 10 percent surged from around 30 percent in 1980 to 48 percent by 2008.
    - Share of the richest 1 percent increased from 8 percent to 18 percent.
    - Income share of the richest 0.1 percent increased fourfold, from 2.6 percent to 10.4 percent.
    - Tax-return-based shares likely underestimate true top shares; for the United States, estimates indicate the top 1 percent received in excess of 20 percent of total income in 2007.
    - The top 1 percent accounted for nearly 35 percent of total wealth (Dumhoff, 2011).
- Distributional dynamics during and after the financial crisis (2007–2010) — country-level examples:
  - Ireland: Gini fell early in the crisis then increased by nearly 2 percentage points by end-2010 as consolidation intensified.
  - Italy: Gini increased by 1 percentage point initially, then eventually decreased.
  - Latvia and Lithuania: Gini increased.
  - Estonia, Greece, and Iceland: Gini fell.
  - France and Spain: Gini increased.
  - Portugal and the Netherlands: Gini fell.
  - United States: Gini changed little, with expansion of public transfers offsetting high unemployment impacts.
- International Gini Database construction (Appendix 1) — coverage and rules:
  - Coverage: 150 advanced and developing economies.
  - Primary sources: EU-SILC; LIS; OECD; SEDLAC; World Bank WDI.
  - Priority given to disposable income; where unavailable, consumption or expenditure used.
  - Reporting in 5-year windows from 1980 through 2010; reporting rules use nearest-year substitution and limited interpolation (italics in Appendix Table 1 indicate an interpolated average).
  - Example country values preserved exactly in source:
    - United States 1980: 30.1; 1985: 33.5; 1990: 33.8; 1995: 36.3; 2000: 36.8; 2005: 38.8; 2010: 38.6; Latest Available Year: 2008; Source: LIS/OECD.
    - Bangladesh 1980: 36.0; 1985: 36.8; 1990: 35.8; 1995: 37.8; 2000: 37.8; 2005: 38.2; 2010: 36.6; Latest Available Year: 2005; Source: WDI.
    - Latin America and Caribbean regional summary: 1980: 46.4; 1985: 49.5; 1990: 47.7; 1995: 51.0; 2000: 52.0; 2005: 50.1; 2010: 47.7.
    - Sub-Saharan Africa regional summary: 1980: 39.6; 1985: 43.8; 1990: 47.2; 1995: 47.1; 2000: 46.1; 2005: 43.6.
  - Validation tests show high correlation in levels and changes across underlying data sources.

### Literature clusters and methodological approaches (Chapter 4 reference list)
- Major topical clusters in cited literature:
  - Fiscal policy, redistribution, and consolidation.
  - Taxation, incidence, and optimal tax design.
  - Subsidies, consumption taxes, indirect taxes, and microsimulation.
  - Social spending, transfers, and cash transfer programs.
  - Redistribution measurement, welfare states, and in-kind benefits.
  - Inequality, growth, crises, labor market, and macro linkages.
- Methodological emphases in cited works:
  - Microsimulation and EUROMOD applications.
  - Benefit incidence analysis for education and health spending.
  - Administrative and survey-based country case studies.
  - Consideration of behavioral responses to taxation (elasticity of taxable income, tax avoidance/evasion).
- Recurring policy themes in the literature:
  - Evaluate and reform subsidies (notably petroleum product subsidies) for cost-efficiency and equity.
  - Use targeted social transfers (including conditional cash transfers) to reduce present and future poverty.
  - Employ microsimulation to assess distributional consequences of tax and benefit reforms.
  - Consider behavioral responses when designing tax policy.
  - Pursue fiscal consolidation strategies that balance short-term costs with long-term gains while considering distributional outcomes.

*Source: IMF staff discussion note — Executive Summary; Box 1; Appendix 1; and related chapters/references as contained in _sdn1208.*

### Executive Summary ......................................................................................................

### EXECUTIVE SUMMARY

### Introduction
- Focus: how fiscal policy can address income inequality in both advanced and developing economies.
- Database: comprehensive database on disposable (post-tax-and-transfer) income inequality for 22 advanced and 128 developing economies.
- Fiscal policy channels:
  - Direct: effect on current disposable incomes.
  - Indirect: effect on future earnings capacities and market (pre-tax-and-transfer) incomes.
- Design considerations:
  - Redistributive tax-benefit systems can introduce economic inefficiencies as individuals and firms change behavior to avoid taxes or maximize transfers; efficiency costs typically increase with the extent of redistribution.
  - Importance of focusing on the overall tax and transfer system rather than on individual components.
- Stated scope: emphasis on what has been the redistributive impact of fiscal policy and how it can be enhanced.

### Trends in Income Inequality
- General findings:
  - Income inequality has increased in most advanced and many developing economies over recent decades.
  - Differences in disposable income inequality across regions are considerably greater than changes in regional averages over time.
- Dataset and measures:
  - Primary measure: Gini coefficient (ranges between 0 and 1).
  - Example provided: “For example, a Gini of 0.3 (or 30 percent) indicates that if two persons were chosen at random from the population, the expected difference between their incomes would be 60 percent of the mean income.”
  - Supplementary measures: 90/10 and 80/20 percentiles and income-share ratios; correlation between extreme inequality measures and the Gini exceeds 0.9.
- Regional patterns and magnitudes:
  - Between 1990 and 2005, average inequality in each region changed by less than 3 percentage points.
  - Two most unequal regions: Sub-Saharan Africa and Latin America — average inequality exceeded a Gini of 0.45 every year.
  - Two most equal regions: emerging Europe and advanced economies — average inequality was less than 0.33 (a difference of 12 percentage points).
  - Within-region variation:
    - Advanced and emerging Europe: inequality increased in nearly all economies; one-third of advanced economies and two-thirds of emerging Europe experienced increases exceeding 3 percentage points between 1990 and 2005.
    - Emerging Europe: inequality increased by more than 5 percentage points in half of economies, with most increases occurring between 1990 and 1995.
    - Latin America: over half of economies saw increased inequality between 1990 and 2005, but inequality has recently started to decline there, with decreases observed in nearly all economies since 2000.
    - Asia and the Pacific: most economies experienced increases; two economies saw decreases in excess of 5 percentage points.
    - Sub-Saharan Africa: regional average inequality fell, but four countries saw increases of more than 3 percentage points.
    - Middle East and North Africa: average inequality stable; three economies saw increases over 3 percentage points (from relatively low initial inequality) and four economies saw decreases over 5 percentage points (from relatively high initial inequality), producing strong inequality convergence within the region.
- Concentration at the top:
  - Over the last three decades, pre-tax-and-transfer (market) income shares of the richest increased substantially in English-speaking advanced economies, and in India and China.
  - Much less increase in Southern European and Nordic economies; hardly any increase in continental Europe and Japan.

### Fiscal Policy and Income Inequality
- Role of fiscal policy:
  - Fiscal policy has played a significant role in reducing income inequality in advanced economies, especially via expenditure (social benefits) and also through progressive income taxation.
- Recent changes in advanced economies:
  - Reforms since the mid-1990s have:
    - Lessened the generosity of social benefits.
    - Reduced the progressivity of income tax systems.
  - Net effect: fiscal policy has become less redistributive since the mid-1990s.
- Policy implications for fiscal consolidation contexts:
  - Tax and spending measures should enhance or maintain the distributive effects of fiscal policy while supporting economic efficiency.
  - Policy measures include:
    - Reducing opportunities for tax evasion and avoidance.
    - Increasing the progressivity of income taxes over higher income brackets.
    - Cutting unproductive expenditures.
    - Expanding means-tested programs.
- Developing-economy specifics:
  - Enhancing distributive impact requires improving capacity to raise tax revenues and to spend resources more efficiently and equitably.
  - Resource mobilization strategies:
    - Broadening income and consumption tax bases.
    - Expanding corporate and personal income taxes by reducing tax exemptions and improving compliance.
  - Expenditure reforms:
    - Reducing universal price subsidies.
    - Improving capacity to implement better targeted transfers.
    - Gradually expanding social insurance systems.

### Fiscal Consolidation and Income Inequality
- Concern: possible adverse impact of fiscal consolidations on low-income groups in some advanced and emerging economies.
- Design guidance during consolidations:
  - Pursue consolidation measures that minimize harm to low-income and vulnerable groups by:
    - Protecting or enhancing redistributive spending targeted at the poor.
    - Implementing revenue measures that increase progressivity and reduce avoidance/evasion.
  - In developing economies, consolidate while improving targeting and efficiency of spending and broadening tax bases.

### Summary and Conclusions
- Key summary statements:
  - Income inequality has risen in most advanced and many developing economies, driven by globalization, technological change, institutional reforms, labor force participation shifts, and demographic household changes.
  - Fiscal policy has historically mitigated inequality in advanced economies, but its redistributive impact has declined since the mid-1990s.
  - In many developing economies fiscal instruments and administrative capacity limit redistributive impact; strengthening tax administration, broadening tax bases, reducing inefficient subsidies, improving targeting, and expanding social insurance can enhance equity.
- Policy package to reconcile redistribution and efficiency during consolidation:
  - Reduce tax evasion and avoidance.
  - Increase progressivity of income taxes at higher brackets.
  - Cut unproductive expenditures.
  - Expand means-tested programs.
  - In developing economies: broaden income and consumption tax bases, reduce exemptions, improve compliance, reduce universal price subsidies, improve targeting, and expand social insurance gradually.

*Source: IMF staff discussion note — Executive Summary*

### 0.5 percent of the global population accounting for more than 35 percent of total global wealth (Credit Suisse

### _sdn1208 - 0.5 percent of the global population accounting for more than 35 percent of total global wealth (Credit Suisse Research Institute, 2010)

### Concentration of income and wealth: key empirical observations
- "0.5 percent of the global population accounting for more than 35 percent of total global wealth" (Credit Suisse Research Institute, 2010).
- United States (selected shares reported):
  - Share of market income captured by the richest 10 percent surged from around 30 percent in 1980 to 48 percent by 2008.
  - Share of the richest 1 percent increased from 8 percent to 18 percent.
  - Income share of the richest 0.1 percent increased fourfold, from 2.6 percent to 10.4 percent.
- Tax-return-based shares likely underestimate true top shares:
  - For the United States, estimates indicate the top 1 percent received in excess of 20 percent of total income in 2007.
  - The top 1 percent accounted for nearly 35 percent of total wealth (Dumhoff, 2011).

### Distributional dynamics during and after the financial crisis (2007–2010)
- No single discernible pattern in inequality changes after the financial crisis; country experiences varied:
  - Ireland: inequality declined early in the crisis (large fall in top incomes, higher taxes, expanded redistributive social transfers), but as the crisis deepened and fiscal consolidation intensified, the Gini coefficient increased by nearly 2 percentage points by end-2010.
  - Italy: Gini coefficient increased by 1 percentage point initially, then eventually decreased as the crisis evolved.
  - Latvia and Lithuania: Gini increased.
  - Estonia, Greece, and Iceland: Gini fell.
  - France and Spain: Gini increased.
  - Portugal and the Netherlands: Gini fell.
  - United States: Gini changed little, with expansion of public transfers offsetting high unemployment impacts.

### Fiscal policy and income inequality — methodology and incidence caveats
- Evaluating fiscal impacts requires comparing incomes with and without taxes/transfers; most empirical work uses statutory incidence assumptions due to data limits.
- Typical statutory assumptions used:
  - Incidence of commodity taxes assumed to fall on consumers.
  - Incidence of factor taxes assumed to fall on factor suppliers.
  - Transfers to beneficiaries assumed not to adjust factor supplies.
- Many studies therefore do not model full general-equilibrium behavioral responses.

### Advanced economies — redistributive role of fiscal policy
- Fiscal policy reduced the average Gini in 25 OECD countries by about one-third between 1985 and 2005, i.e., by around 15 percentage points (OECD, 2008, 2011a).
- In 2005:
  - Fiscal policy reduced income inequality by around 20 or more points in seven economies: Belgium, Denmark, Germany, Italy, Luxembourg, Poland, and the Slovak Republic.
  - Fiscal policy reduced income inequality by less than 10 points in five economies: Korea, Iceland, Ireland, Switzerland, and the United States.
- On average, redistribution achieved by public cash transfers is twice as large as that achieved through taxes.
  - Exception: United States—taxes are more redistributive than transfers.
- Non-means-tested transfers (public pensions and universal child benefits) account for much of expenditure-side redistribution, notably in Nordic economies, Austria, Belgium, Poland, and Hungary.
- Income taxes often achieve greater redistribution than means-tested transfers in most economies; United Kingdom and Ireland are exceptions where means-tested benefits account for most redistribution.

### Changes in redistributive impact over time
- Between mid-1980s and mid-1990s:
  - Market income Gini increased by 3 percentage points.
  - Disposable income Gini increased by 0.8 points.
  - Decrease in inequality due to fiscal policy increased by 2.2 percentage points (from 9.5 to 11.7), offsetting 73 percent of the 3 percentage-point increase in market income inequality.
- Over the two decades from mid-1980s to mid-2000s:
  - Fiscal policy offset a lower 53 percent of the increase in market income inequality.
- Decline in redistributive impact attributed to policy reforms since the mid-1990s that reduced generosity of social benefits (unemployment, social assistance) and reduced income tax rates, especially at higher income levels.

### Efficiency–equity trade-offs and policy design
- Means-tested benefit withdrawal as earnings increase creates significant work disincentives for low-skilled workers.
  - Immervoll and others (2007): transferring an additional euro from high- to low-income individuals through traditional means-tested programs can reduce the welfare of high-income individuals by 2 to 4 euros in most economies.
- Policy responses to reduce the equity-efficiency trade-off include:
  - Introducing in-kind benefits linked to employment.
  - Expanding active labor market programs (tighter eligibility rules, intensified job search requirements, training).
  - These policies require substantial administrative capacity.
- Progressive income tax schedules can create disincentives for higher-income earners; reductions in top tax rates in many economies during the 1980s were followed by relatively high income growth at the top.
- Recent research suggests the efficiency cost of progressive taxation may be smaller than previously thought:
  - Piketty, Saez, and Stantcheva (2011): absence of correlation between rising top incomes and per capita GDP growth suggests top income increases reflect rent-seeking rather than productivity increases, motivating calls for more progressive taxation of high-net-wealth individuals.
- Tax evasion and avoidance opportunities for higher-income groups can reduce revenue potential and redistributive impact and may shift remuneration toward stock options and capital gains.

### Indirect taxes, in-kind transfers, and corporate taxation
- Indirect taxes:
  - In 12 EU economies, the effective indirect tax rate (share of consumption taxes in total household income) is on average three times higher for the bottom income decile than for the top decile (O’Donoaghue, Baldini and Mantovani, 2004).
  - Both VAT and excise duties are regressive; excise taxes are especially regressive—their share in total income is four times higher in the bottom decile than in the top decile.
- In-kind transfers:
  - Public spending on education, health care, housing, and food transfers is highly redistributive.
  - In five European economies (Belgium, Germany, Greece, Italy, and the United Kingdom), in-kind transfers decreased the Gini coefficient by 5.8 percentage points, with health accounting for 3.6 points and education for 2.2 points (Paulus, Sutherland, and Tsakloglou, 2009).
- Corporate income taxes:
  - Long-run incidence is difficult to establish; depends on relative mobility of capital and labor.
  - Recent empirical evidence suggests between 45 and 75 percent of the corporate tax burden falls on wages (Gentry, 2007; Arulampalam, Devereux and Maffini, 2010).
  - Because wage earners typically have lower mean incomes than capital income recipients, corporate taxes may be less progressive than they appear.

### Developing economies — constrained redistributive capacity
- Lower overall tax and transfer levels limit redistributive potential:
  - Average tax ratios: advanced economies exceed 30 percent of GDP.
  - Ratios in developing economies (excluding emerging Europe) generally fall in the range 15–20 percent of GDP.
- Lower spending, especially transfer spending in Asia and the Pacific and Sub-Saharan Africa, explains much of the weaker redistributive impact.
- Example: almost three-quarters of the difference in disposable income inequality between Latin American economies and advanced economies can be explained by fiscal policy differences.

*Source: IMF staff analysis and cited studies as presented in the source content.*

### Box 1. Fiscal Policy and Income Inequality in Latin America

### Box 1. Fiscal Policy and Income Inequality in Latin America

### Fiscal policy effectiveness: key findings
- In the mid-2000s the tax and transfer system decreased the average Gini (the difference between the Ginis for market and disposable incomes) in six Latin American economies (Argentina, Brazil, Chile, Colombia, Mexico, and Peru) by only about 2 percentage points, from 0.52 to 0.50.  
- A comparable set of 15 European economies experienced a decrease of around 20 percentage points, from 0.46 to 0.27.  
- Almost three-quarters of the difference in the Ginis for disposable income between these Latin America and European countries (18 out of the 23 points) can therefore be explained by different fiscal policies.  

### Causes of limited redistributive impact in Latin America and developing economies
- Low tax and spending levels
  - Tax collections in the region are below the levels achieved in economies with similar levels of income, with the median being 4 percentage points lower.  
  - Social transfers in the six Latin American economies average 7.6 percent of GDP compared to 16.3 percent in the 15 European economies.
- Regressive tax and spending mix
  - Increases in the tax ratio have relied more on regressive indirect taxes and a decreasing share of more progressive income taxation.  
  - Narrow tax bases (due to tax evasion, numerous loopholes, a large informal sector and weak tax administrations) limit redistributive effectiveness.
- Poor targeting and low coverage of transfers
  - The richest 40 percent capture over 70 percent of social spending in Latin America.  
  - In the early 2000s the share of the population above the legal retirement age in receipt of a pension in developing economies was, on average, around 40 percent, as compared to 90 percent in European economies.  
- In-kind public spending regressivity
  - Aggregate education and health spending is regressive in many developing economies; primary education and primary health care can be progressive, but regressivity of secondary/tertiary and higher-level health spending dominates.
- Fiscal space eroded by regressive universal price subsidies, especially energy price subsidies.

### Tax instruments: distributive characteristics
- Indirect taxes
  - Greater reliance on indirect taxes and narrower tax bases limit redistributive potential.  
  - Taxes on imports often appear among the most regressive; excise taxes (fuel, alcohol, tobacco) tend to be progressive.  
  - Exemption of small businesses (including agriculture and the informal sector) can result in a progressive incidence of value-added taxes.
- Direct taxes
  - Personal income and property taxes are generally progressive, but high noncompliance and narrow bases (widespread exemptions and preferential treatment of capital and other income) produce low income tax ratios and low progressivity.
  - Resource taxation can be progressive and efficient but is applied mostly to foreign incomes.
- Corporate income taxes
  - Often progressive, but can be horizontally inequitable when levied only on large enterprises.

### Conditional cash transfer programs
- Expansion of conditional cash transfer programs is a promising approach to enhance distributive power of public spending.
- In Latin America, 17 economies are currently operating conditional cash transfer programs, with program expenditures typically falling below 1 percent of GDP.
- The largest programs, in Brazil and Mexico, have reduced the Gini for disposable income by 2.7 percentage points, accounting for about a fifth of the decrease in the Gini coefficient between the mid-1990s and the mid-2000s.
- Cost-effectiveness is highest when targeted at the poorest households; expansions must be carefully designed to generate human capital impacts and avoid labor supply disincentives.

### Fiscal consolidation and income inequality: mechanisms and evidence
- Two channels by which consolidation affects inequality:
  1. Short-run macroeconomic effects: consolidation reduces output and increases unemployment, associated with a declining wage share and wider wage inequality.  
  2. Policy composition effects: inequality increases more when adjustment relies on regressive taxes or cuts in progressive spending.
- Definition (exact): A large fiscal consolidation is defined as one that lasts at least three years, where the cyclically adjusted primary balance (CAPB) improves by at least 5 percent of GDP, and where the cumulative change in the CAPB is not reversed by more than 1 percentage point from one year to the next.
- Advanced economies
  - Episodes of large fiscal adjustment have been associated with sizeable increases in unemployment in the short term.
  - Protecting unemployment benefits and progressive social services can contain widening inequality; cutting government services can worsen distribution.
  - Long-term unemployment effects have tended to reverse, though a permanent downward shift in potential output may mute recovery.
  - Adjustments biased towards expenditure cuts have tended to exacerbate income inequality.
  - Examples (Denmark, Germany, Iceland, Sweden) show protecting progressive benefits and improving targeting can minimize inequality impacts.
- Developing economies
  - Large fiscal adjustments have had relatively significant impacts on the real economy and unemployment, but increases in unemployment have typically been of shorter duration than in advanced economies.
  - Fiscal consolidation is often essential to reduce high inflation, which adversely affects inequality, and can improve employment prospects in the long term.
  - Because much government spending in developing economies is not progressive, expenditure reductions concentrated in non-progressive areas can improve equity.
  - Revenue measures will likely be needed; adverse distributional effects of these can be mitigated by reforms that enhance the efficiency and equity of the tax system.

### Policy recommendations — advanced economies
- In the short term:
  - Protect the most redistributive social benefits (including unemployment benefits) until economic recovery reduces unemployment to cushion aggregate demand and mitigate inequality effects.
  - Expand active labor market programs (job-search support, targeted wage subsidies, training programs) to accelerate fall in unemployment and avoid persistent high unemployment.
- Over the medium term:
  - Greater reliance on progressive revenue measures can reduce the need for deep cuts in social transfers, subject to existing tax levels.
  - Remove opportunities for tax avoidance and evasion to improve efficiency and distributional outcomes.
  - Increase reliance on progressive wealth and property taxes.
  - Broaden expenditure reform to include military spending, subsidies (including tax expenditures), and public-sector wages.

### Policy recommendations — developing economies
- Strengthen resource mobilization capacity and use more progressive tax and spending instruments to enhance fiscal policy’s ability to address inequality.
- On the tax side:
  - Short-term focus on broadening income and consumption tax bases.
  - Expand corporate and personal income tax bases by reducing tax exemptions, closing loopholes, and improving tax compliance to raise revenues for progressive transfers.
  - Expand the consumption tax base (e.g., broader adoption of value-added tax); design consumption taxes to mitigate distributional impacts (appropriate treatment of small businesses and excises on luxury goods).
- On the expenditure side:
  - Rely more on targeted (as opposed to universal) social expenditures to protect households from poverty and to improve education and health outcomes for disadvantaged households.
  - Eliminate fiscally costly and inefficient universal price subsidies (including tax expenditures) to generate resources in the short term.
  - Scale up conditional cash transfer programs as part of social protection strategies.
  - Broaden coverage of public pension systems; where constrained, consider greater use of targeted social pensions.

*Source: Box 1. Fiscal Policy and Income Inequality in Latin America, _sdn1208.*

### Appendix 1. Construction of the International Gini Database

### Appendix 1. Construction of the International Gini Database

### Coverage and primary data sources
- The inequality database covers 150 advanced and developing economies.
- Gini estimates are drawn from five data sources: European Union Statistics on Income and Living Conditions (EU-SILC); Luxembourg Income Study (LIS); Organisation for Economic Cooperation and Development (OECD); Socio-Economic Database for Latin America and the Caribbean (SEDLAC); and the World Bank, World Development Indicators (WDI).
- Priority was given to reporting estimates based on disposable income; where unavailable, estimates based on consumption or expenditure were used.
- For advanced, emerging Europe, and Latin America and the Caribbean economies, the Gini coefficients are based on disposable per capita income data.
- For the majority of other economies, estimates are based on per capita consumption or expenditures.
- All estimates reported are drawn from household surveys.

### Construction rules and temporal structure
- The constructed Gini database is unbalanced: Ginis do not exist for all economies over all years.
- Appendix Table 1 reports Ginis for 5-year windows, starting in 1980 and ending in 2010.
- Reporting rule for each 5-year reference point:
  - If the Gini for the reference year (e.g., 1990 or 1995) is available it is reported;
  - otherwise the reported Gini is based on the nearest year (first below then above) to the reference year if available;
  - otherwise it is based on the second years below or above.
- For economies where Gini estimates come from two sources, this reflects using separate sources for different years to allow coverage of more recent years.
- Example combining LIS and EU-SILC: LIS is the main source for most advanced economies, but LIS only goes up to 2007; to obtain Ginis for more recent years the absolute changes in the disposable income Gini coefficient according to EU-SILC (which only starts around 2006) are added to the Gini for 2007 from LIS.

### Validation and comparability
- Validation tests were carried out to ensure comparability in the underlying data sources; these tests show that both the level and changes in Ginis in both databases are highly correlated.

### Interpolation and use in figures/tables
- Note: Italics in Appendix Table 1 indicate an interpolated average.
- In Figure 1 and Table 1 of the main note, for economies where a Gini coefficient is not available for 1990 (2005) from Appendix Table 1, the Gini for 1995 (2000) is used to calculate the average Gini for 1990 (2005) and the change in the Gini between 1990 and 2005.
- Lists of economies for which imputations were applied:
  - For 1990, the relevant economies are Portugal, Greece, India, Nepal, Vietnam, China, Mongolia, Armenia, Azerbaijan, Albania, Georgia, Slovenia, Bolivia, the Dominican Republic, Nicaragua, Peru, Jamaica, Cameroon, Central African Republic, Ethiopia, Cote d’Ivoire, Madagascar, Mozambique, Swaziland, and Burkina Faso.
  - For 2005, the relevant economies are Laos, Russia, Mauritania, Tunisia, Turkmenistan, Cameroon, Guinea Bissau, Swaziland, and Tanzania.

### Representative data characteristics (selected examples preserved exactly as in source)
- LIS coverage limitation: LIS only goes up to 2007; EU-SILC starts around 2006.
- Appendix Table 1 presents many country-year Gini values in 5-year windows from 1980 through 2010 (table entries preserved in the source). Example country values as reported in Appendix Table 1 (selected excerpts):
  - Advanced: United States 1980: 30.1; 1985: 33.5; 1990: 33.8; 1995: 36.3; 2000: 36.8; 2005: 38.8; 2010: 38.6; Latest Available Year of latest data: 2008; Source: LIS/OECD.
  - Asia and Pacific: Bangladesh 1980: 36.0; 1985: 36.8; 1990: 35.8; 1995: 37.8; 2000: 37.8; 2005: 38.2; 2010: 36.6; Bangladesh Latest Available Year: 2005; Source: WDI.
  - Latin America and Caribbean regional summary: 1980: 46.4; 1985: 49.5; 1990: 47.7; 1995: 51.0; 2000: 52.0; 2005: 50.1; 2010: 47.7.
  - Sub-Saharan Africa regional summary: 1980: 39.6; 1985: 43.8; 1990: 47.2; 1995: 47.1; 2000: 46.1; 2005: 43.6.
- The Appendix Table 1 contains country-level Gini series for the 1980–2010 period in five-year increments; the table in the source provides the complete set of values and source attribution for each entry.

*Source: Appendix 1. Construction of the International Gini Database (as provided in the supplied content).*

### Chapter 4 in The Oxford Handbook of Economic Inequality, ed. by W. Salverda, B.

### Chapter 4 in The Oxford Handbook of Economic Inequality, ed. by W. Salverda, B. Nolan, and T. M. Smeeding (Oxford: Oxford University Press)

### Major topical clusters in the chapter's references
- Fiscal policy, redistribution, and consolidation
  - Chu, K-Y., H. Davoodi, and S. Gupta, 2004, "Income Distribution and Tax and Government Social-Spending Policies in Developing Countries."
  - Clinton, K., M. Kumhof, D. Laxton, and S. Mursula, 2010, "Budget Consolidation: Short-Term Pain and Long-Term Gain," IMF Working Paper 10/163.
  - Gupta, S., B. Clements, E. Baldacci, and E. Tiongson, 2005, "What Sustains Fiscal Consolidations in Emerging Market Countries?," International Journal of Finance & Economics, Vol. 10, No. 4, pp. 307–21.
  - IMF, 2010a, "Strategies for Fiscal Consolidation in the Post-Crisis World," IMF Policy Paper 10/11.
  - IMF, 2010b, Fiscal Monitor: Shifting Gears Tackling Changes on the Road to Fiscal Adjustment.
  - Lustig, N., et al., 2011, "Fiscal Policy and Income Distribution in Latin America: Challenging the Conventional Wisdom," Tulane Economics Working Paper 1124.

- Taxation, incidence, and optimal tax design
  - Coady, D., 2006, "The Distributional Impacts of Indirect Tax and Public Pricing Reforms."
  - Gentry, W., 2007, "A Review of the Evidence on the Incidence of the Corporate Income Tax," U.S. Department of the Treasury, Paper 101.
  - Gruber, J., and E. Saez, 2002, "The Elasticity of Taxable Income: Evidence and Implications," Journal of Public Economics, Vol. 84, No. 1, pp. 1–32.
  - Piketty, T., E. Saez, and S. Stantcheva, 2011, "Optimal Taxation of Top Labor Incomes: A Tale of Three Elasticities," CEPR Discussion Paper 8675.
  - Tanzi, V., 2011, "Equity, Transparency, Cooperation and the Taxation of High Net Worth Individuals," paper presented at the Fourth International Tax Dialogue, December 7–9.

- Subsidies, consumption taxes, indirect taxes, and microsimulation
  - Coady, D., R. Gillingham, R. Ossowski, J. Piotrowski, S. Tareq, and J. Tyson, 2010, "Petroleum Product Subsidies: Costly, Inequitable, and Rising," IMF Staff Position Note SPN/10/05.
  - Decoster, A., J. Loughrey, C. O’Donoghue, and D. Verwerft, 2009, "Microsimulation of Indirect Taxes," International Journal of Microsimulation, Vol. 4, No. 2, pp. 41–56.
  - Warren, N., 2008, "A Review of Studies on the Distributional Impact of Consumption Taxes in OECD Countries," OECD Social, Employment, and Migration Working Paper 64.
  - O’Donoaghue, C., M. Baldini, and D. Mantovani, 2004, "Modelling the Redistributive Impact of Indirect Taxes in Europe: An Application of EUROMOD," Euromod Working Paper EM7/01.

- Social spending, transfers, and cash transfer programs
  - Davoodi, H. R., E. Tiongson, and S. Sachjapinan Asawanuchit, 2010, "Benefit Incidence of Public Education and Health Spending Worldwide: Evidence from a New Database," Poverty and Public Policy, Vol. 2, No. 2.
  - Fiszbein, A., and N. Shady, 2009, Conditional Cash Transfers: Reducing Present and Future Poverty (World Bank).
  - Garcia, M., and C. Moore, 2012, The Cash Dividend: The Rise of Cash Transfer Programs in Sub-Saharan Africa (Directions in Development).
  - Soares, S., et al., 2007, "Conditional Cash Transfers in Brazil, Chile, and Mexico: Impacts Upon Inequality," IPC Working Paper 35.

- Redistribution measurement, welfare states, and in-kind benefits
  - Garfinkel, I., L. Rainwater, and T. M. Smeeding, 2006, "A Re-examination of Welfare States and Inequality in Rich Nations: How In-Kind Transfers and Indirect Taxes Change the Story," Journal of Policy Analysis and Management, Vol. 25, No. 4, pp. 897–919.
  - Immervoll, H., et al., 2005, "Household Incomes and Redistribution in the European Union: Quantifying the Equalising Properties of Taxes and Benefits," EUROMOD Working Paper EM9/05.
  - Immervoll, H., and L. Richardson, 2011, "Redistribution Policy and Inequality Reduction in OECD Countries: What Has Changed in Two Decades," OECD Social, Employment, and Migration Working Paper 122.
  - Paulus, A., et al., 2009, "The Effects of Taxes and Benefits on Income Distribution in the Enlarged EU," EUROMOD Working Paper EM8/09.
  - Paulus, A., H. Sutherland, and P. Tsakloglou, 2009, "The Distributional Impact of In-Kind Public Benefits in European Countries," EUROMOD Working Paper EM10/09.

- Inequality, growth, crises, labor market, and macro linkages
  - Forbes, K., 2000, "A Reassessment of the Relationship Between Inequality and Growth," American Economic Review, Vol. 90, No. 4, pp. 869–87.
  - Kumhof, M., and R. Rancière, 2010, "Inequality, Leverage, and Crises," IMF Working Paper 10/268.
  - Rajan, R., 2010, Fault Lines: How Hidden Fractures Still Threaten the World Economy.
  - Mokoyama, T., and A. Sahin, 2006, "Costs of Business Cycles for Unskilled Workers," Journal of Monetary Economics, Vol. 53, No. 8, pp. 2179–193.
  - Rotemberg, J.J., and M. Woodford, 1999, "The Cyclical Behavior of Prices and Costs," in Handbook of Macroeconomics, Vol. 1, pp. 1051–135.

### Key data sources and databases cited
- Credit Suisse Research Institute, 2010, Global Wealth Report, October.
- European Commission, 2012, EUROSTAT Statistics on Income, Social Inclusion and Living Conditions.
- Luxembourg Income Study Database, 2012, "Inequality and Poverty—Key Figures."
- Socio-Economic Database for Latin America and the Caribbean (SEDLAC), 2010, A Guide to the SEDLAC Socio-Economic Database for Latin America and the Caribbean.
- World Bank, 2010, World Development Indicators 2010.
- International Labor Organization (ILO), 2010, "World Social Security Report 2010/11: Providing Coverage in Times of Crisis and Beyond."

### Methodological approaches emphasized by references
- Microsimulation and EUROMOD applications (Decoster et al., O’Donoaghue et al., Immervoll et al., Paulus et al.).
- Benefit incidence analysis for education and health spending (Davoodi et al.).
- Working papers and country case studies using administrative and survey data to trace distributional impacts (Jenkins et al.; Nolan, Callan, and Maitre, 2011; Thompson and Smeeding, 2011).
- Analytical and policy papers on tax elasticity and behavioral responses (Gruber and Saez, 2002; Saez, 2004).

### Recurring policy themes and recommendations in the cited literature
- Evaluate and reform subsidies (notably petroleum product subsidies) for cost-efficiency and equity (Coady et al., 2010, SPN/10/05).
- Use targeted social transfers (including conditional cash transfers) to reduce present and future poverty (Fiszbein and Schady, 2009; Soares et al., 2007).
- Employ microsimulation to assess distributional consequences of tax and benefit reforms and to design more equitable policies (EUROMOD-related works).
- Consider behavioral responses to taxation when designing tax policy (Gruber and Saez, 2002; Piketty, Saez, and Stantcheva, 2011).
- Pursue fiscal consolidation strategies that balance short-term costs with long-term gains while considering distributional outcomes (Clinton et al., 2010; IMF Policy Paper 10/11).

*Source: Chapter 4 reference list, The Oxford Handbook of Economic Inequality (as contained in the supplied PDF).*

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