Tackling Inequality on All Fronts
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- Authors: DAVID AMAGLOBELI, CELINE THEVENOT
- Published: March 2, 2022
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, such as 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: complementary roles
- Predistributive public policies (for example, public education) aim to narrow differences in market incomes at their source and help ensure an equal playing field.
- Redistribution through taxes and transfers is needed to help people cope with life events related to unemployment, aging, family, disability, or sickness.
- An effective strategy requires a mix of policy instruments that:
- level the playing field before people enter the labor market;
- ensure labor market conditions remain fair and socially acceptable;
- bring necessary corrections through redistribution.
Fiscal spending, social sectors, and outcomes
- 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.
- Fiscal policy is described as the most agile and effective tool to curb inequalities at each stage of their emergence.
- Public spending can partly compensate for gaps in private spending on children and help reduce the importance of parental background.
- Public investments cited include basic public infrastructure (clean water and sanitation), basic health services, and education.
- The type of spending needs careful assessment given country-specific circumstances; example: spending on higher education might benefit mostly richer households.
Opportunities and incentives through fiscal policy
- Fiscal policy can influence labor market participation and children’s education via:
- labor tax wedges and participation tax rates (noted as especially important for second earners);
- refundable tax credits for low-income families;
- individualization of personal income tax filing;
- more widely available and affordable childcare;
- conditional cash transfers that provide incentives for school attendance or regular health checkups.
- Active labor market policies highlighted:
- public employment services to assist the unemployed in finding suitable jobs;
- government-sponsored vocational training for those most excluded from the labor market;
- worker retention programs used in advanced economies to maintain employment linkages during crises.
Redistribution: effectiveness and design
- 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.
- Most redistribution is achieved through social transfers—social assistance, unemployment insurance, or pensions.
- Effectiveness of social transfers depends on coverage of the most vulnerable groups and adequacy of benefits rather than aggregate spending levels.
- Well-targeted transfers can support vulnerable groups while keeping costs manageable.
- Digitalization is an opportunity to improve identification, verification, coverage, 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 relatively low in overall burden and progressivity.
- Ways to achieve more redistributive tax systems include:
- higher top marginal income tax rates;
- (in-work) tax credits for low-income households;
- limiting loopholes in the taxation of capital income (dividends, interest, and capital gains).
- Tax policy and administration reforms are crucial for raising additional revenues, especially in countries with weak tax capacity.
- Indirect taxes (value-added tax and excises) are major revenue sources and relatively easy to enforce and collect.
- While consumption taxes could be regressive, they can support equity objectives if used to finance basic public services (health care, education, infrastructure), since poor households benefit more from these services in proportion to their incomes.
- Opportunities from digitalization for revenue and administration include real-time data on household expenditures to facilitate progressive taxation of consumption and international registers for asset ownership to increase transparency.
- Tax administration reforms can generate resources for higher spending on health, education, and social protection.
Navigating fiscal trade-offs and medium-term policy design
- Fiscal policy often implies trade-offs under tight budget constraints; the COVID-19 crisis has heightened these trade-offs.
- Fiscal support helped maintain livelihoods and contributed to a swift recovery but came at a cost of 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 to implement policies over the medium term to bring deficits sustainably down.
- Rising spending pressures include population aging, climate change, and acceleration of digitalization; many countries will need to maintain higher health care spending and increase education spending.
- 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 the negative impact on vulnerable groups.
- Policy recommendations include:
- country-specific medium-term policies that account for demographic and fiscal circumstances;
- structural pension and health care reforms where aging pressures are significant;
- 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.
Authors
- DAVID AMAGLOBELI, deputy division chief, IMF Fiscal Affairs Department.
- CELINE THEVENOT, senior economist, IMF Fiscal Affairs Department.
Source: "Tackling Inequality on All Fronts," F&D Magazine, March 2022.
Content in this bundle
- Tackling Inequality on All Fronts
- التصدي لعدم المساواة على جميع الجبهات
- Lutter contre les inégalités sur tous les fronts
- БОРЬБА С НЕРАВЕНСТВОМ НА ВСЕХ ФРОНТАХ
- Abordar la desigualdad en todos los frentes ● Finanzas y Desarrollo ● Marzo de 2022
- 全面解决 - 不平等