Meeting Rising Pressures to Address Income Inequality—A User’s Guide
IMF Blog, March 19, 2014
Source details
- Canonical URL
- Meeting Rising Pressures to Address Income Inequality—A User’s Guide
Other formats
Bibliographic details
- Authors: Sanjeev Gupta, Michael Keen
- Published: March 19, 2014
Key high-level findings
- Fiscal redistribution can be compatible with, and in some cases supportive of, higher economic growth; an earlier IMF study found that on average, fiscal redistribution has been associated with higher growth because it helps reduce inequality.
- Design matters: redistributive policies can be distortive if poorly designed or pushed too far; well-designed redistributive fiscal policies can improve efficiency and support growth (for example, by enhancing human capital of low-income households).
- Redistribution requires joint consideration of tax and spending instruments and must account for administrative capacity and other macroeconomic objectives.
Impact of taxes and spending on redistribution
- In advanced economies:
- Fiscal policy reduces income inequality mostly through transfers—such as pensions and other social benefits.
- Income taxes also decrease inequality; transfers and income taxes have been found to decrease inequality—as measured by the Gini coefficient—in advanced economies by an average of around one-third.
- In developing economies:
- Low levels of taxes and spending limit the extent of fiscal redistribution.
- Incomplete access of the poor to public education and health reduces the redistributive impact of in-kind spending.
- Developing economies have much lower social spending and a relatively smaller share allocated to social benefits (social insurance and social assistance).
- The redistributive impact of social benefits is diminished by incomplete coverage of lower-income groups and large shares of transfers leaking to higher-income groups.
- The distribution of in-kind spending (education and health) often reinforces, rather than reduces, inequality because the poor often have less access to public schools or health facilities.
Principles for smart design (top and bottom of income distribution)
- General principles:
- Redistribution should be designed to be efficient and avoid distortions.
- All income groups should pay their fair share of taxes, including those at the top, but tax rates should not be so high as to significantly reduce work effort and investment and thus depress economic growth.
- Taxes should be designed to be hard to evade.
- Priority spending for the bottom should focus on programs that improve health and education because these programs increase labor productivity, improving equality and raising economic growth.
- Targeting spending to lower-income groups is important to achieve distributive goals at a lower fiscal cost; targeting should avoid withdrawing benefits so rapidly as to significantly discourage work effort.
Tax-side policy options (recommendations)
- Consider a greater role for recurrent property taxes:
- Property taxes are underutilized in many countries, particularly in developing economies where they have significant potential.
- Move toward more progressive personal income taxes where appropriate:
- There is room for a number of countries to move away from flat tax rates to more progressive rate structures.
- Progressivity is often impaired by deductions that disproportionately benefit higher-income taxpayers.
- Revive inheritance and gift taxes modestly:
- While these have never been, and probably will not be, big revenue raisers, a modest revival that prevents ample evasion and avoidance could have a marked effect.
Spending-side policy options (recommendations)
- Expand access of low-income families to education and health:
- For education: expand scholarships for low-income families.
- In developing countries: focus health access on providing essential services.
- In advanced economies: focus on maintaining access for the poor, even during periods of spending restraint.
- Target social benefits and strengthen incentives to work:
- Replace untargeted benefits (such as energy subsidies) with more targeted programs.
- In advanced economies: link social benefits to labor force participation (including through childcare subsidies and child tax credits) to strengthen incentives to enter the labor market and decrease welfare dependency.
- Safeguard pensions and raise retirement ages appropriately:
- In advanced economies: ensure that benefit levels for poor pensioners are not reduced.
- In developing economies with low pension coverage among the elderly poor: focus on expanding coverage through noncontributory, means-tested social pensions.
Concluding thoughts
- Efficient policy design requires attention to detail and to the joint impacts of taxes and spending, not separate consideration of each instrument.
- Redistribution must be consistent with other macroeconomic objectives and account for administrative capacity constraints.
- The authors conclude that constraints are not insurmountable and that substantial knowledge now exists about how governments can best reconcile equity and efficiency concerns.
IMF blog post: "Meeting Rising Pressures to Address Income Inequality—A User’s Guide" (Sanjeev Gupta, Michael Keen, March 19, 2014).
Content in this bundle
- 如何面对收入不平等方面日益增长的压力——决策者指引; 2014年3月19日; 作者：Sanjeev Gupta 和Michael Keen; iMFdirect博客
- 所得格差問題への高まる対処圧力への対応—利用者ガイド; サンジーブ・グプタ、マイケル・キーン, iMFdirect ブログ 2014年3月19日掲載
- Fiscal Policy and Income Inequality; IMF Policy Paper; January 23, 2014
- Staff Discussion Note
- 031914r
