Redistributive Implications of Fiscal Policy

1. Redistributive Implications of Fiscal Policy Income Redistribution or Poverty Alleviation NIPFP

2. Scheme of Presentation • Introduction • Concept of equity in fiscal policy • Redistributive effects of tax policy • Progressivity of expenditures • Income Redistribution versus poverty alleviation • Pro-poor expenditures: some counter-intuitive findings. • Concluding remarks NIPFP

3. Introduction • Evolution of concept of equity in tax policy • Horizontal and vertical equity concepts. Uneasy case for progressive taxation • Limited effectiveness of tax/expenditure policy on redistribution • Calibration of equitable fiscal policy- need to shift emphasis to human development and poverty alleviation NIPFP

4. Concept of Equity in Tax Policy • Emphasis on vertical equity-achieving more equal distribution of incomes; • High and differentiated tax rates • Developed countries: differentiation of direct taxes • Developing countries: differentiation in indirect taxes. • Transitional economies: administered prices NIPFP

5. Redistributive Effects of Tax Policy • Pechman - Okhner Study for US • Conclusion- US Tax system is not significantly progressive • Tax burden - 25% of family income • Top decile reduction 2.06 percentage points • Improvement in the lowest decile 0.12 percentage point. • Gini coefficient: • Most progressive: 0.4367 0.4158 • Least progressive: 0.4252 0.4240 • Effective tax rate: • MP 21.9% 25.3% • LP 28.2% 23.3% NIPFP

6. NIPFP

7. Redistributive Effects of Tax Policy • Progressivity of Tax System in Chile • tax System close to proportional • Gini coefficient moderative regressive. • Insensitivity of income distribution to the tax system. NIPFP

8. NIPFP

9. Progressivity of Expenditures • Transfers have bigger influence than taxes in redistribution. • Distribution of incomes is quite insensitive to both tax and expenditures. • Chile’s case distribution of transfers progressive 37.5% poorest quintile 28.1% next quintile; 3.2% richest quintile. NIPFP

10. Political Economy of Government Budgets • Neither tax nor expenditure system is likely to alter basic pattern of income distribution • Attempts to modify income distribution was fashionable half a century ago. • Confiscatory tax rates: India 92%; US 95%; UK 91%. • Efficient tax system: optimal taxation • Expenditure has greater potential: public education and medical care. Middle income groups also benefit and access higher education better. • Income distribution changes achieved is not much NIPFP

11. Political Economy of Redistribution • Role of education in redistribution - socioeconomic mobility, demographic transition, targeting, productivity, • Should the governments bother to redistribute? • Calibrating non-regressive taxes • Incidence assumptions- corporation tax • More desirable option: reducing poverty. NIPFP

12. Returns to Rural Investments in India NIPFP

13. Returns to Rural Investment in China NIPFP

14. Returns to Rural Investment in China NIPFP

15. Concluding Remarks • Equity in fiscal policy: Shift of emphasis from “reducing the incomes of the rich” to “increasing the incomes of the poor”. • Progressive rate schedule need not necessarily result in an equitable tax system • Income redistribution better achieved through expenditure side • Shift of emphasis from income redistribution to poverty alleviation. • Need to avoid regressive tax policies to finance anti poverty interventions. • Direct spending on anti-poverty interventions is not necessarily the most efficient way of reducing poverty. NIPFP