Designing Fiscal Redistribution: The Role of Universal and Targeted Transfers

IMF Working Papers, June 26, 2020

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There is a growing debate on the relative merits of universal and targeted social assistance transfers in achieving income redistribution objectives.
Benefits of targeting: a larger poverty impact for a given transfer budget or lower fiscal cost for a given poverty impact.
Costs of targeting: incentive, administrative, social and political costs.
The appropriate balance between targeted and universal transfers depends on countries' trade-offs between these costs and benefits and on the potential for redistribution through taxes.
The paper discusses trade-offs across different country contexts and potential for strengthening fiscal redistribution in advanced and developing countries, including through expanding transfer coverage and progressive tax financing.

Targeted transfers can yield a larger poverty impact for a given transfer budget.
Targeted transfers can achieve a given poverty impact at a lower fiscal cost.
Targeting entails costs that may offset its benefits: incentive costs, administrative costs, social costs, and political costs.
Optimal design depends on country-specific trade-offs and the capacity to raise redistribution via the tax system.

Consider expanding transfer coverage where feasible to strengthen fiscal redistribution.
Combine transfer design choices with progressive tax financing to enhance redistribution.
Assess country-specific administrative and political constraints when choosing between universal and targeted approaches.
Evaluate incentive effects of targeting in the context of broader labor market and social protection policies.

Subject: Fiscal redistribution, Income inequality, Income tax systems, National accounts, Personal income, Poverty, Taxes
Keywords: consumption taxation, cost, earned income, East Africa, efficiency cost, Fiscal redistribution, Global, income, Income inequality, income redistribution objective, income share, income tax schedule, Income tax systems, income transfer, means testing, Middle East, North Africa, Personal income, poverty impact, poverty line, progressive tax, public spending, redistribution objective, Sub-Saharan Africa, targeted, taxation framework, taxes, transfer program, transfers, universal, WP