Equity and Fiscal Policy: The Income Distribution Effects of Taxation and Social Spending in Central America
IMF Working Papers, May 1, 2010
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- Equity and Fiscal Policy: The Income Distribution Effects of Taxation and Social Spending in Central America
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Bibliographic details
- Authors: Rodrigo Cubero, Ivanna Vladkova Hollar
- Published: May 1, 2010
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781455200719.001
Summary findings
- How does fiscal policy fare in improving the underlying income distribution in Central America? We integrate the data from a number of existing tax and public expenditure studies for the countries in the region and find that the distributional effect of taxation is regressive but small.
- In contrast, the redistributive impact of social spending is large and progressive, leading to a progressive net redistributive effect in all countries of the region.
- Raising tax revenues and devoting the proceeds to social spending would unambiguously improve the income of the poorest households.
Major themes and analysis
- Distributional effect of taxation: regressive but small.
- Redistributive impact of social spending: large and progressive.
- Net effect of fiscal policy: progressive net redistributive effect in all countries analyzed.
- Policy scenario explored: raising tax revenues and allocating additional revenue to social spending to improve incomes of the poorest households.
Policy implications and recommendations
- Prioritize social spending to achieve large, progressive redistributive impacts.
- Consider raising tax revenues with the explicit aim of devoting proceeds to social spending, as this would unambiguously improve the income of the poorest households.
- Recognize that relying on the current tax structure alone is insufficient for redistribution given its regressive but small effect.