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Fiscal Policy and Income Inequality Fiscal Policy and Income Inequality

Sanjeev Gupta Sanjeev Gupta Deputy Director Deputy Director Deputy Director Deputy Director

Fiscal Affairs Department, IMF Fiscal Affairs Department, IMF IMF

IMF--Hitotsubashi Hitotsubashi University Workshop University Workshop IMF

IMF--Hitotsubashi Hitotsubashi University Workshop University Workshop March 12, Tokyo

March 12, Tokyo

Structure of the presentation Structure of the presentation

Trends in inequality

 Including inequality of income and wealth

Redistributive role of fiscal policy

Redistributive role of fiscal policy

Design of efficient redistributive fiscal policy

 Basic principles for designing fiscal redistribution

 Design of spending measures (cash and in-kind transfers)

 Design of tax measures (direct and indirect taxes)

2

(2)

I T d i I lit I. Trends in Inequality

3

Inequality has been increasing in most economies

economies

0 5 0.55

0 4 0.45 0.5

ent

0 3 0.35 0.4

Gini coefficie

0 2 0.25 0.3

0.2

1980 1985 1990 1995 2000 2005 2010

Advanced (21) Asia and Pacific (14)

Emerging Europe (21) Latin America and Caribbean (19)

Middle East and North Africa (12) Sub-Saharan Africa (22)

4

(3)

Global Inequality and Income Growth Global Inequality and Income Growth

5

Inequality Between Countries Down, Inequality Within Countries Up

Inequality Within Countries Up

Income Inequality in the 1980s and 2000s

0.67 0.68 0.69

World Gini Coefficient, 1970 - 2006

65 ZAF

75

2000s

Income Inequality in the 1980s and 2000s

0.63 0.64 0.65 0.66

HKG

ISR SGP GBR USA

ARG BWA

BRA

BGR

CHL

CHN

COL CRIDOMECU

SLV GAB GTM

IDN IRN

JAM

KAZLVA JOR LTU

MKD MUS MYS

MEX

MAR

PRY PAN PER

PHL

RUS LKATHA

TUNTTO TUR

TKM URY

VEN ARM

BOL

CMR CPV

CIV

GEO GHA

HTI HND KEN

KGZ

LSO MDG MLI MWI

MRT MDA

NPL

RWA NGA SLE

TZA UZB UGA

ZMB

45 55

ality (Gini Index)

0.59 0.6 0.61 0.62

70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06

AUS BEL AUT CYP CAN

CZE DNK

EST FIN

DEU FRAGRC IRL JPNITAKOR NLDLUX

NZL

NOR PRT

SVK SVN

ESP

SWE CHE USADZA

AZE BHS

BLR BGR

HRV EGY HUN

PAKIND POL ROM

UKR BGD

ETH

MRT MDA

TJK TZA

15 25 35

Inequa

Advanced Economies Emerging Markets Low Income Countries

197 197 197 197 197 198 198 198 198 198 199 199 199 199 199 200 200 200 200

2World inequality is defined by the Gini Index, assuming the world is one country. Source: Sala-i-Martin (2006).

15

15 25 35 45 55 65 75

Inequality (Gini Index) 1980s Source: Solt (2009)

6 6

(4)

In Asia, although poverty has decreased substantially, inequality has increased substantially, inequality has increased

Po ert ($2/da ) and Gro th 1990 2010 Gini Coefficient Poverty ($2/day) and Growth 1990-2010 Gini Coefficient

0 TWN 10

e

0.45 MYS 0.5

2010 Average = 0.37 1990 Average = 0.35

BGD

KHM LKA

IND LAO MYS PHL

30 -20 -10

e in Poverty Rate

KHM LKA LAO

PHL THA

VNM CHN

MNG#N/A 0 35

0.4

010

IDN NPL THA

VNM -50

-40 -30

Absolute Change

BGD TWN

IDN IND NPL 0.3

200.35

CHN

-70 -60

0 2 4 6 8 10

A

Average Annual Growth Rate (GDP per Capita)

0.2 0.25

0.2 0.25 0.3 0.35 0.4 0.45 0.5

1990

Average Annual Growth Rate (GDP per Capita) 1990

Countries included: BGD=Bangladesh; BTN=Bhutan; KHM=Cambodia; CHN=China; FJI=Fiji; IND=India; IDN=Indonesia; KIR=Kiribati; KOR=Korea, Republic of;

LAO=Laos; MYS=Malaysia; MDV=Maldives; MHL=Marshall Islands; MNG=Mongolia; MMR=Myanmar; NPL=Nepal; PNG=Papua New Guinea;

PHL=Philippines; WSM=Samoa; SLB=Solomen Islands; LKA=Sri Lanka; THA=Thailand; TON=Tonga; VUT=Vanuatu; VNM=Vietnam; PAK=Pakistan. 7

More recently, the focus has been on the rising income share of top income earners

Gross Income Share of Top One-Percent in Selected Advanced and Developing Economies, 1925–2012

rising income share of top income earners

20 25

20 25

15

cent

15

5 Perc 10

5 10

0 5

0 5

8

United Kingdom Australia Canada

South Africa India United States

China

France Germany Japan

Netherlands Sweden Mauritius

(5)

Public support for redistribution has been rising g

AUT 0.9

Public Support for Redistribution AUT

FIN DEU

SVN

SWE ESP

CHE

AZE ALB

BIH HRV HUN

ROM

SRB

SVK

TUR INDCHL

0.7

BEL CAN

FRA ISL

IRL

NLD ITA

POL NOR PRT

ESP GBR

NGA USA

ZAF ARM

BLR

MDA

RUS EST

LTU MNE

SVK ARG

BRA CHL

MEX

URY CHN AUS

0.5

Late 2000s

DNK NGA

GEO

BGR UKR LVA

MKD MLT

PER

JPN KOR

0.3 TWN

0.1

0.1 0.3 0.5 0.7 0.9

Late 1990s Source: Integrated Values Survey 1981-2008

99

Wealth is even more unequally distributed Wealth is even more unequally distributed

90

100 Wealth Gini

Disposable income Gini

= 70.7

= 37.7

70 80

40 50 60

20 30

0 10

IDN MYS IND PHL THA KOR PNG FJI CHN SLB LKA TON VUT KHM LAO MDV MNG VNM NPL BGD PAK

S Di bl i Gi i i t k f OECD L b I St d D t b S i E i D t b f L ti

10

Source: Disposable income Gini is taken from OECD; Luxembourg Income Study Database; Socio-Economic Database for Latin America and the Caribbean (SEDLAC); World Bank; Eurostat. Wealth Gini data comes from Credit Suisse Global Wealth Databook (2012).

Countries included: BGD=Bangladesh; BTN=Bhutan; KHM=Cambodia; CHN=China; FJI=Fiji; IND=India; IDN=Indonesia; KIR=Kiribati; KOR=Korea, Republic of;

LAO=Laos; MYS=Malaysia; MDV=Maldives; MHL=Marshall Islands; MNG=Mongolia; MMR=Myanmar; NPL=Nepal; PNG=Papua New Guinea;

PHL=Philippines; WSM=Samoa; SLB=Soloman Islands; LKA=Sri Lanka; THA=Thailand; TON=Tonga; VUT=Vanuatu; VNM=Vietnam; PAK=Pakistan.

(6)

Intergenerational income mobility is higher in countries with low income inequality q y

ITA

CHE GBR

USA 0.5

→)

FRA ESP

CHE

0.4

ess mobility

GER

JPN

0.3 NZL

elasticity (le

SWE AUS

nal earnings 0.2

CAN

DNK

FIN NOR

y = 0.0251x - 0.3709

Generation

11

0.1

20 25 30 35

Gini (around 1985; higher inequality→)

II. Redistributive Role of Fiscal Policy

12

(7)

Redistributive fiscal policy reduces inequality by one third in advanced economies mostly through spending

0.30

From taxes Average market income Gini: 0.43

third in advanced economies, mostly through spending

0.20 0.25

From transfers Average disposable income Gini: 0.29

0.15

te Gini reduction Total redistribution = 0.14

0.05 0.10

Absolut

From transfers = 0.09

0.00

DNK CZE BEL SVN NOR GBR FIN AUT SWE LUX DEU FRA AUS IRL NLD ISR CAN USA EST ITA GRC ESP KOR

13

Countries included: AUS=Australia; AUT=Austria; BEL=Belgium; CAN=Canada; CZE=Czech Republic; DEU=Germany;

DNK=Denmark; ESP=Spain; EST=Estonia; FIN=Finland; FRA=France; GBR=United Kingdom; GRC=Greece; ISR=Israel;

IRL=Ireland; ITA=Italy; KOR=Korea; LUX=Luxembourg; NLD=Netherlands; SVN=Slovenia; SWE=Sweden; TWN=Taiwan Province of China; USA=United States.

Fiscal redistribution also low reflecting low revenues and social spending

low revenues and social spending

Composition of social spending, 2010 (Percent GDP)

Composition of revenues, 2010 (Percent GDP)

25 30

(Percent GDP)

3 40 45

(Percent GDP)

15 20

20 25 30 35

5 10

5 10 15 20

0 Advanced

{30} Emerging Europe

{19}

South America {10}

Central America and

Caribbean {13}

MENA{14} Asia and Pacific

{22}

Sub-Saharan Africa

{29}

i l i l h d i

0 5

Advanced {31} Emerging

Europe {21}

Latin America {27} Sub-Saharan

Africa {36}

Asia and Pacific

{24} MENA

{21}

Indirect taxes Income taxes and contributions

Corporate Income Tax Revenue Other tax revenue Social protection Health Education

Corporate Income Tax Revenue Other tax revenue Total revenue mean

14

(8)

Social protection spending also low in Asia Social protection spending also low in Asia

12 14

8 10 12

4 6 8

0 2 4

Social protection, public spending (percent GDP) APD median

APD population weighted average

Countries included: BGD=Bangladesh; BTN=Bhutan; KHM=Cambodia; CHN=China; FJI=Fiji; IND=India; IDN=Indonesia; KIR=Kiribati; KOR=Korea, Republic of;

LAO=Laos; MYS=Malaysia; MDV=Maldives; MHL=Marshall Islands; MNG=Mongolia; MMR=Myanmar; NPL=Nepal; PNG=Papua New Guinea;

PHL=Philippines; WSM=Samoa; SLB=Soloman Islands; LKA=Sri Lanka; THA=Thailand; TON=Tonga; VUT=Vanuatu; VNM=Vietnam; PAK=Pakistan. 15

…. and low spending reflected in low coverage of social insurance…..

coverage of social insurance…..

87% 86%

90 100

Percent of Population above Legal Retirement Age in Receipt of a Pension

50 60 70 80

38% 37%

22% 21%

20 30 40

0 10

Advanced (n=27) Emerging Europe

(n=18) Middle East and

North Africa (n=17) Latin America

(n=21) Asia and Pacific

(n=19) Sub-Saharan Africa (n=27)

16

(9)

…..especially among lower-income groups

…..especially among lower income groups

Social Protection Coverage and Benefit Share of Poorest 40%

50 60

nt)

Social Protection Coverage and Benefit Share of Poorest 40%

Median = 42.5

30 40

ncidence (Percen

0 10 20

Benefit In

Median = 14.6

0

0 10 20 30 40 50 60 70 80 90 100

Coverage (Percent)

Asia and Pacific Latin America and Caribbean Middle East and North Africa Sub-Saharan Africa

Social protection includes pensions and social assistance transfers 17

Health spending low and outcomes poor…….

poor…….

60 Mortality rate, infant (per 1,000 live births) 9

10 Health, public spending (percent GDP) APD median

APD population weighted average

40 50

APD median

APD population weighted average

7 8

APD population weighted average

30 40

4 5 6

10 20

1 2 3

0

PNG KIR IND KHM NPL BGD SLB IDN PHL MNG FJI VNM VUT CHN THA TON MDV LKA MYS BRN SS Africa MENA ntral America outh America erging Europe Advanced

0

KIR SLB NPL VUT TON MDV FJI MNG THA CHN VNM PNG MYS BRN KHM LKA IDN PHL IND BGD Advanced erging Europe Latin America SS Africa MENA Cen So Eme

Eme L

Countries included: BGD=Bangladesh; BTN=Bhutan; KHM=Cambodia; CHN=China; FJI=Fiji; IND=India; IDN=Indonesia; KIR=Kiribati; KOR=Korea, Republic of;

LAO=Laos; MYS=Malaysia; MDV=Maldives; MHL=Marshall Islands; MNG=Mongolia; MMR=Myanmar; NPL=Nepal; PNG=Papua New Guinea;

PHL=Philippines; WSM=Samoa; SLB=Soloman Islands; LKA=Sri Lanka; THA=Thailand; TON=Tonga; VUT=Vanuatu; VNM=Vietnam; PAK=Pakistan. 18

(10)

………with gaps in health coverage among lower-income groups

80

lower income groups

Shares of Health Spending Benefiting the Poorest 40%

60 70

30 40 50

0 10 20

0

CHL 2009 ARG 2009 COL 2010 URY 2009 BOL 2007 EGY 2005 BRA 2009 BOL 2009 BLR 2002 PER 2009 ZAF 2010 HND 2004 ARM 2011 MNG 1995 MEX 2010 ETH 2011 BGD 2000 ZMB 2009 IDN 2012 SLV 2011 TUR 2003 MOZ 1997 BGR 1995 THA 2008 GTM 2010 ROM 1997 GHA 1998 IND 1996 ECU 1998

19

Source: Lustig (2015); Davoodi, Tiongson, and Asawanuchit (2010); Lustig et. Al (2011); World Bank..

Countries included: ALB=Albania; ARG=Argentina; ARM=Armenia; AZE=Azerbaijan; BEN=Benin; BGD=Bangladesh; BIH=Bosnia and Herzegovina;

BOL=Bolivia; BRA=Brazil; CHL=Chile; CIV=Cote d’Ivoire; COL=Colombia; CRI=Costa Rica; EGY=Egypt; ETH=Ethiopia; GTM=Guatemala; IDN=Indonesia;

IND=India; KEN=Kenya; KHM=Cambodia; KSV=Kosovo; LBR=Liberia; LSO=Lesotho; MEX=Mexico; MOZ=Mozambique; NAM=Namibia; NPL=Nepal;

PER=Peru; SLV=El Salvador; THA=Thailand; TUR=Turkey; UGA=Uganda; URY=Uruguay; UZB=Uzbekistan; ZAF=South Africa; ZMB=Zambia.

Low education spending also leads to low education outcomes…..

education outcomes…..

12 Education, public spending (percent GDP) 90

100 Secondary net enrollment rate APD median

APD population weighted average

8 10

APD median

APD population weighted average

70 80

APD population weighted average

6 8

40 50 60

2 4

10 20 30

0

KIR MYS MDV THA PNG FJI BRN SLB VUT IND TON MNG VNM PHL IDN NPL CHN LKA BGD KHM Advanced Latin America MENA erging Europe SS Africa

0

BRN LKA FJI MNG THA IDN MYS PHL NPL VUT BGD SLB KHM Advanced erging Europe MENA outh America ntral America SS Africa

Countries included: BGD=Bangladesh; BTN=Bhutan; KHM=Cambodia; CHN=China; FJI=Fiji; IND=India; IDN=Indonesia; KIR=Kiribati; KOR=Korea, Republic of;

LAO=Laos; MYS=Malaysia; MDV=Maldives; MHL=Marshall Islands; MNG=Mongolia; MMR=Myanmar; NPL=Nepal; PNG=Papua New Guinea;

PHL=Philippines; WSM=Samoa; SLB=Soloman Islands; LKA=Sri Lanka; THA=Thailand; TON=Tonga; VUT=Vanuatu; VNM=Vietnam; PAK=Pakistan.

L Eme Eme S Ce

20

(11)

……and gaps in coverage among lower- income groups

income groups

Shares of Education Spending and Market Income Benefitting the Poorest 40%

80

60 70 80

30 40 50

0 10 20

NAM 2003 LSO 2002 BRA 2009 ARG 2009 PER 2009 SLV 2011 URY 2009 CHL 2009 ARM 2011 COL 2010 MEX 2010 ZAF 2010 ALB 2002 BIH 2001 GTM 2010 BOL 2009 CRI 2001 KEN 2006 KHM 2002 TUR 2001 IDN 2012 AZE 2001 LBR 2008 KSV 2000 THA 2008 NPL 2004 BOL 2007 UZB 2000 CIV 2008 BEN 2003 MOZ 2003 EGY 2005 ETH 2011 UGA 2006 BGD 2000 ZMB 2009

21

Source: Lustig (2015); Davoodi, Tiongson, and Asawanuchit (2010); Lustig et. Al (2011); World Bank..

Countries included: ALB=Albania; ARG=Argentina; ARM=Armenia; AZE=Azerbaijan; BEN=Benin; BGD=Bangladesh; BIH=Bosnia and Herzegovina;

BOL=Bolivia; BRA=Brazil; CHL=Chile; CIV=Cote d’Ivoire; COL=Colombia; CRI=Costa Rica; EGY=Egypt; ETH=Ethiopia; GTM=Guatemala; IDN=Indonesia;

IND=India; KEN=Kenya; KHM=Cambodia; KSV=Kosovo; LBR=Liberia; LSO=Lesotho; MEX=Mexico; MOZ=Mozambique; NAM=Namibia; NPL=Nepal;

PER=Peru; SLV=El Salvador; THA=Thailand; TUR=Turkey; UGA=Uganda; URY=Uruguay; UZB=Uzbekistan; ZAF=South Africa; ZMB=Zambia.

…and there is no “Robin Hood” paradox p

In Kind-Social Spending and Market Income Inequality, 2010

BOL 8%

9%

Educa on/GDP vs Mkt Income Gini

BRA URY

6%

Health/GDP vs Mkt Income Gini

BRA

SLV CHL ETH

IND

MEX

ZAF

4% URY 5%

6%

7%

ducaon/GDP

ARM

BOL CHL

COL SLV

ETH GTM

MEX PER

ZAF URY

2%

3%

4%

5%

Health/GDP

ARM SLV COL

PER URY GTM

1%

2%

3%

0.3 0.4 0.4 0.5 0.5 0.6 0.6 0.7 0.7 0.8 0.8

E

Mkt Income Gini

ETH

0% IND

1%

2%

0.3 0.4 0.4 0.5 0.5 0.6 0.6 0.7 0.7 0.8 0.8

H

Mkt Income Gini

Mkt Income Gini Mkt Income Gini

22

Source: Lustig (2015).

Countries included: ARM=Armenia; BOL=Bolivia; BRA=Brazil; CHL=Chile; COL=Colombia; ETH=Ethiopia; GTM=Guatemala; IND=India; MEX=Mexico;

PER=Peru; SLV=El Salvador; URY=Uruguay; ZAF=South Africa.

(12)

Energy subsidies are high and sometimes exceed social spending p g

(In percent of GDP, 2011)

10 12

Tax subsidies Pretax subsidies

8

10 Education spending

Health spending

4 6

0 2

0

Thailand Maldives Korea, Republic of Malaysia Bhutan Fiji Indonesia India Pakistan Sri Lanka Myanmar

23

K

Most of the benefits from energy subsidies accrue to upper income households pp

Distribution of Petroleum Product Subsidies in Asian Countries by Income Groups (in percent of total product subsidies)

3 6 10 Gasoline

21 19 Kerosene Bottom

quintile 10

61 19 20

21 20 Top

Diesel 21 LPG

Top quintile

7 12

16 42

4 8 13 54

24

23 21

54

(13)

III. Designing Efficient g g Redistributive Fiscal Policy

25

Designing efficient redistributive fiscal policy Designing efficient redistributive fiscal policy

 Redistributive fiscal policy should be consistent with macroeconomic objectives

macroeconomic objectives

 The impact of tax and spending policies should be evaluated jointly

evaluated jointly

 Tax and expenditure policies need to be carefully designed to balance distributional and efficiency g y objectives

 Design should take into account administrative capacity

26

(14)

Reform options to achieve more efficient redistribution of social spending

Social transfers

Expand conditional cash transfer (CCT) programs as administrative p (CC ) p g capacity improves (e.g., programs exist in Bangladesh, Cambodia, India, Indonesia, Nepal and Philippines)

Expand noncontributory social pensions – as means-tested (e.g.

Bangladesh, Korea, Malaysia, Nepal, Viet Nam), pensions-tested (e.g.

Fiji, Thailand) or a universal cash transfer (e.g. Brunei, PNG, Timor) j ) ( g )

Remove general price subsidies and better target social transfers (e.g., Indonesia) by addressing: ) y g

• Fragmentation and duplication—reduce number of programs (Vietnam)

• Low coverage and benefits—expand coverage with savings from targeting Reliance on costl in kind benefits se cash benefit (China India)

• Reliance on costly in-kind benefits—use cash benefit (China, India)

Expand public works programs (e.g., Bangladesh, India)

27

Reform options to achieve more efficient redistribution of social spending

Health Health

Expand coverage of publicly financed basic health package and health insurance (China, Vietnam)

Reduce or eliminate user charges for low-income households (e.g., Indonesia)

Address supply-side barriers in less developed areas (e.g. Bangladesh, Laos, Vietnam)

Improve efficiency of health spending

28

(15)

Reform options to achieve more efficient redistribution of social spending

Education Education

Improve access of low-income families to education by:

• increasing investment in lower levels of education (Philippines)

• focusing on access and progression to primary and lower-secondary g p g p y y education (e.g. Bhutan, Cambodia, Iran, Lao, Mongolia)

expanding coverage for girls and students in rural areas (e.g. expanding coverage for girls and students in rural areas (e.g.

Bangladesh, India)

29

Reform options to achieve more efficient redistribution of taxation

Personal income taxation

Implement progressive Personal Income Tax (PIT) rate structures (e g Korea Implement progressive Personal Income Tax (PIT) rate structures (e.g. Korea, Thailand, Viet Nam)

Expand coverage of the PIT pa d co e age o e

Reconsider income tax exemptions, based on a critical tax-expenditure review (e.g., India, Indonesia, China)

Impose a reasonable PIT exemption threshold

Capital income taxation

Develop more effective taxation of multinationals (e.g. China, India, Japan) Exchange information internationally

30

(16)

Reform options to achieve more efficient redistribution of taxation

Property taxation

Utilize better the opportunities for recurrent property taxes (e.g. Hong Kong, Singapore, Viet Nam)

• Improve administrative infrastructure

Cons mption ta ation Consumption taxation

Minimize VAT exemptions and special VAT rates

Set a sufficiently high VAT registration threshold (e.g. Indonesia, Singapore, Viet Nam)

U ifi i i l f th th di t ib ti

Use specific excises mainly for purposes other than redistribution

31

Thank you!

32

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