Fiscal Policy and Income Inequality€¦ · From taxes Average market income Gini: 0.43 third in...

Fiscal Policy and Income InequalityFiscal Policy and Income Inequality

Sanjeev GuptaSanjeev GuptaDeputy DirectorDeputy DirectorDeputy DirectorDeputy Director

Fiscal Affairs Department, IMFFiscal Affairs Department, IMF

IMFIMF--HitotsubashiHitotsubashi University WorkshopUniversity WorkshopIMFIMF--HitotsubashiHitotsubashi University WorkshopUniversity WorkshopMarch 12, TokyoMarch 12, Tokyo

Structure of the presentationStructure 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 litI. Trends in Inequality

3

Inequality has been increasing in most economieseconomies

0 5

0.55

0 4

0.45

0.5

ent

0 3

0.35

0.4

Gin

i coe

ffic

ie

0 2

0.25

0.3

0.21980 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 GrowthGlobal Inequality and Income Growth

5

Inequality Between Countries Down,Inequality Within Countries UpInequality Within Countries Up

Income Inequality in the 1980s and 2000s

0.67

0.68

0.69

World Gini Coefficient, 1970 - 2006

ZAF65

75

2000

s

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

SLVGAB

GTM

IDNIRN

JAM

JORKAZLVALTU

MKDMYSMUS

MEXMAR

PANPRY PER

PHL

RUS LKATHA

TTOTUN TUR

TKMURY

VENARM

BOL

CMR

CPV

CIV

GEO GHA

HTIHND

KEN

KGZ

LSO

MDG

MWIMLIMRTMDA

NPL

NGARWA SLE

TZA

UGAUZB

ZMB

45

55

alit

y (G

ini I

nd

ex)

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

AUTBEL

CANCYP

CZEDNK

EST

FIN

FRADEU

GRC

IRL

ITAJPN KOR

LUXNLD

NZL

NOR

PRT

SVKSVN

ESP

SWE

CHE

USADZA

AZE BHSBLR

BGR

HRV

EGY

HUN

INDPAK

POLROM

UKRBGD

ETH

MRTMDATJK

TZA

15

25

35

Ine

qu

a

Advanced Economies

Emerging Markets

Low Income Countries

19

7

19

7

19

7

19

7

19

7

19

8

19

8

19

8

19

8

19

8

19

9

19

9

19

9

19

9

19

9

20

0

20

0

20

0

20

0

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) 1980sSource: Solt (2009)

6 6

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

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

TWN0

10

e

MYS0.45

0.52010 Average = 0.371990 Average = 0.35

BGD

KHMLKA

INDLAO

MYS

PHL

30

-20

-10

e in

Po

vert

y R

ate

KHM

LKA

LAO

PHL

THA

VNM

CHN

MNG#N/A

0 35

0.4

010

IDNNPL THA

VNM

-50

-40

-30

Ab

solu

te C

han

ge

BGDTWN

INDIDN

NPL

0.3

0.35

20

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 0.51990Average 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 Advancedand Developing Economies, 1925–2012

rising income share of top income earners

20

25

20

25

15

cen

t

15

5

10Per

c

5

10

0

5

0

5

8United Kingdom Australia CanadaSouth Africa India United StatesChina

France Germany Japan

Netherlands Sweden Mauritius

Public support for redistribution has been risingg

AUT

0.9Public Support for Redistribution

AUT

FIN

DEUSVN

ESPSWE

CHEAZEALB

BIHHRV

HUN

ROM

SRB

SVK

TUR

CHLIND

0.7

BEL

CAN

FRA

ISL

IRL

ITANLD

NORPOL PRT

ESP

GBR

USANGA

ZAF

ARM

BLR

MDA

RUS

EST

LTU MNE

SVK

ARGBRA

CHL

MEX

URY

AUSCHN

0.5

Lat

e 20

00s

DNK

NGA

GEO

UKRBGR

LVAMKD

MLT

PER

JPN KORTWN0.3

0.10.1 0.3 0.5 0.7 0.9

Late 1990s

Source: Integrated Values Survey 1981-2008

99

Wealth is even more unequally distributedWealth is even more unequally distributed

90

100Wealth Gini

Disposable income Gini

= 70.7

= 37.7

70

80

40

50

60

20

30

0

10

IDN

MYS

IND

PH

L

THA

KO

R

PN

G FJI

CH

N

SLB

LKA

TON

VU

T

KH

M

LAO

MD

V

MN

G

VN

M

NP

L

BG

D

PA

K

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 inequalityq y

ITA

CHE

GBR

USA

0.5

→)

FRAESP

CHE

0.4

ess

mob

ility

GER

JPN

NZL0.3el

asti

city

(le

AUSSWE

0.2nal e

arni

ngs

CAN

DNK

FINNOR

y = 0.0251x - 0.3709

Gen

erat

ion

11

0.120 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

0.25From transfers Average disposable income Gini: 0.29

0.15

te G

ini

red

uct

ion

Total redistribution = 0.14

0.05

0.10

Ab

solu

t

From transfers = 0.09

0.00

DN

K

CZ

E

BE

L

SV

N

NO

R

GB

R

FIN

AU

T

SW

E

LUX

DE

U

FR

A

AU

S

IRL

NLD ISR

CA

N

US

A

ES

T

ITA

GR

C

ES

P

KO

R

13Countries 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=TaiwanProvince of China; USA=United States.

Fiscal redistribution also low reflecting low revenues and social spendinglow 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

0Advanced

{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 contributionsCorporate Income Tax Revenue Other tax revenue Social protection Health EducationCorporate Income Tax Revenue Other tax revenueTotal revenue mean

14

Social protection spending also low in AsiaSocial 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

60n

t)

Social Protection Coverage and Benefit Share of Poorest 40%

Median = 42.5

30

40

nci

den

ce (

Per

cen

0

10

20

Ben

efit

In

Median = 14.6

00 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

17Social protection includes pensions and social assistance transfers

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


40

50

APD median


7

8


30

40

4

5

6

10

20

1

2

3

0

PN

G

KIR

IND

KH

M

NP

L

BG

D

SLB

IDN

PH

L

MN

G FJI

VN

M

VU

T

CH

N

THA

TON

MD

V

LKA

MYS

BR

N

SS A

fric

a

MEN

A

ntr

al A

mer

ica

ou

th A

mer

ica

ergi

ng

Euro

pe

Ad

van

ced

0

KIR

SLB

NP

LV

UT

TO

NM

DV

FJI

MN

GT

HA

CH

NV

NM

PN

GM

YS

BR

NK

HM

LKA

IDN

PH

LIN

DB

GD

Adv

ance

der

ging

Eur

ope

Latin

Am

eric

aS

S A

fric

aM

EN

A

Cen So

Eme

Em

e 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

200

9

COL

2010

URY

200

9

BOL

2007

EGY

2005

BRA

2009

BOL

2009

BLR

2002

PER

2009

ZAF

2010

HN

D 2

004

ARM

201

1

MN

G 1

995

MEX

201

0

ETH

201

1

BGD

200

0

ZMB

2009

IDN

201

2

SLV

2011

TUR

2003

MO

Z 19

97

BGR

1995

THA

2008

GTM

201

0

ROM

199

7

GH

A 19

98

IND

199

6

ECU

199

8

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…..

12Education, public spending (percent GDP) 90

100 Secondary net enrollment rate

APD median


8

10

APD median


70

80


6

8

40

50

60

2

4

10

20

30

0

KIR

MYS

MD

V

THA

PN

G FJI

BR

N

SLB

VU

T

IND

TON

MN

G

VN

M

PH

L

IDN

NP

L

CH

N

LKA

BG

D

KH

M

Ad

van

ced

Lati

n A

mer

ica

MEN

A

ergi

ng

Euro

pe

SS A

fric

a

0

BR

N

LKA

FJI

MN

G

TH

A

IDN

MY

S

PH

L

NP

L

VU

T

BG

D

SLB

KH

M

Adv

ance

d

ergi

ng E

urop

e

ME

NA

outh

Am

eric

a

ntra

l Am

eric

a

SS

Afr

ica

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

Em

e S

Ce

20

……and gaps in coverage among lower-income groupsincome groups

Shares of Education Spending and Market Income Benefitting the Poorest 40%80

60

70

80

30

40

50

0

10

20

NAM

200

3

LSO

200

2

BRA

2009

ARG

200

9

PER

2009

SLV

2011

URY

200

9

CHL

2009

ARM

201

1

COL

2010

MEX

201

0

ZAF

2010

ALB

2002

BIH

200

1

GTM

201

0

BOL

2009

CRI 2

001

KEN

200

6

KHM

200

2

TUR

2001

IDN

201

2

AZE

2001

LBR

2008

KSV

2000

THA

2008

NPL

200

4

BOL

2007

UZB

200

0

CIV

2008

BEN

200

3

MO

Z 20

03

EGY

2005

ETH

201

1

UG

A 20

06

BGD

200

0

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

CHL SLV

ETH

IND

MEX

ZAF

URY 4%

5%

6%

7%

du

cao

n/G

DP

ARM

BOL

CHL

COL

SLV

ETH GTM

MEX PER

ZAF URY

2%

3%

4%

5%

He

alth

/GD

P

ARM COL

SLV GTM PER

URY

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

IND 0%

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 GiniMkt 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 spendingp g

(In percent of GDP, 2011)

10

12

Tax subsidies

Pretax subsidies

8

10Education spending

Health spending

4

6

0

2

0

Thai

lan

d

Mal

div

es

Ko

rea,

Rep

ub

lic o

f

Mal

aysi

a

Bh

uta

n

Fiji

Ind

on

esia

Ind

ia

Pak

ista

n

Sri L

anka

Mya

nm

ar

23

K

Most of the benefits from energy subsidies accrue to upper income householdspp

Distribution of Petroleum Product Subsidies in Asian Countries by Income Groups

(in percent of total product subsidies)

3 610

Gasoline

1921

KeroseneBottom quintile

10

1961

20

21

20

Top

Diesel

21

LPG

Top quintile

712

16

42

4 8

13

54

2423

21

54

III. Designing Efficient g gRedistributive Fiscal Policy

25

Designing efficient redistributive fiscal policyDesigning efficient redistributive fiscal policy

Redistributive fiscal policy should be consistent with macroeconomic objectivesmacroeconomic objectives

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

Tax and expenditure policies need to be carefully designed to balance distributional and efficiency g yobjectives

Design should take into account administrative capacity

26

Reform options to achieve more efficient redistribution of social spending

Social transfersExpand conditional cash transfer (CCT) programs as administrative p (CC ) p gcapacity 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


HealthHealthExpand 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


EducationEducationImprove 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 yeducation (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 taxationImplement progressive Personal Income Tax (PIT) rate structures (e g KoreaImplement 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 taxationDevelop more effective taxation of multinationals (e.g. China, India, Japan)

Exchange information internationally

30

Reform options to achieve more efficient redistribution of taxation

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

• Improve administrative infrastructure

Cons mption ta ationConsumption taxationMinimize 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 tiUse specific excises mainly for purposes other than redistribution

31

Thank you!

32

Fiscal Policy and Income Inequality€¦ · From taxes Average market income Gini: 0.43 third in...

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