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
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
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
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
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.
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
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
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
…..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
………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
……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.
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
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
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)
27Reform 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
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
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