Giving Everyone a Fair Shot
IMF Blog, April 1, 2021
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- Authors: David Amaglobeli, Vitor Gaspar, Paolo Mauro
- Published: April 1, 2021
COVID-19 and inequality
- Inequality was a pre-existing condition that worsened COVID-19’s impact: disparities in access to basic services contributed to uneven health outcomes.
- Countries with worse access to health care, proxied by the number of hospital beds, have had higher COVID-19 mortality rates than predicted by the number of cases and age structure.
- Countries with higher relative poverty had higher rates of both cases and deaths.
- Education losses in 2020 are estimated at a quarter of the school year in advanced economies and twice as much in emerging market and developing economies.
- Children from poorer families have been disproportionately affected; we estimate that up to 6 million children in emerging market and developing economies could drop out of school in 2021, with lifelong adverse consequences.
- The pandemic has hit the most vulnerable groups hardest: lower-skilled and younger workers have experienced more job losses; disadvantaged ethnic groups and informal sector workers have been harder hit; and women, overrepresented in sectors most affected by COVID-19 such as hospitality and retail, have been particularly affected, especially in poorer countries.
A holistic approach
- Breaking the cycle of inequality requires both predistributive and redistributive policies:
- Predistributive policies ensure access to basic public services and good jobs, reducing income inequality before taxes and transfers.
- Redistributive policies (taxes and transfers) complement predistributive measures.
- Investing in education, healthcare, and early childhood development can improve lifetime opportunities.
- If governments increased spending on education by 1 percent of GDP, for example, they could reduce the gap in enrollment rates between the richest and the poorest families by almost one-third.
- Governments should focus on reducing spending inefficiencies, which are sizable, especially in poorer countries.
- Social safety nets are vital: a good social safety net that can be quickly activated provides lifelines to struggling families.
- High social spending is effective in reducing poverty only when it provides adequate assistance and covers the poorest segments of society.
- Developing and maintaining comprehensive social registries with a reliable citizen identification system is a good investment.
- Effective distribution mechanisms such as e-payments and, where access to bank accounts is limited, mobile money transfers are important complements.
- Enhancing access to basic public services will require additional resources; options include:
- Strengthening overall tax capacity.
- Relying more on property and inheritance taxes in many countries.
- Raising tax progressivity where feasible, including room to increase top marginal personal income tax rates.
- Eliminating loopholes in capital income taxation.
- Levying temporary COVID-19 recovery contributions as supplements to personal income taxes for high-income households.
- Modernizing corporate income taxation.
- In emerging market economies and low-income countries, additional revenues could be raised through consumption taxes to finance social spending.
- Low-income countries will need support from the international community to help with financing and implementing home-grown taxation and spending reforms.
Strong public support needed
- Governments may want to develop comprehensive policy packages that promise expanded access to public services and better protection from income shocks while supporting a job-rich, inclusive recovery.
- In some countries, public support for better access to basic services, financed through higher taxes, has been strong and is likely increasing with the pandemic.
- A recent survey in the United States shows that those who had personally experienced the impact of COVID-19, either through illness or unemployment, have developed a stronger preference for more progressive taxation.
- Such policies should be embedded in medium-term fiscal frameworks and complemented by actions that strengthen transparency and accountability.
- Meaningful gains in spending efficiency are necessary.
- Experience with past pandemics shows that trust in government can quickly deteriorate and contribute to greater polarization; resolute actions by governments to deliver needed services and foster inclusive growth can counteract this trend and help build social cohesion.
Giving Everyone a Fair Shot — David Amaglobeli, Vitor Gaspar, Paolo Mauro, April 1, 2021.