Fiscal policy and income redistribution in Latin America: Challenging the conventional wisdom
AbstractConventional wisdom states that fiscal policy redistributes little in Latin America. Lower tax revenues and – above all – lower and less progressive transfers have been identified as the main cause. Existing studies show that, while in Europe the distribution of all transfers combined (cash and in-kind) is egalitarian, the bulk of transfers in Latin America accrue to the upper quintile. Through an in-depth fiscal incidence analysis applied to Argentina, Bolivia, Brazil, Mexico and Peru we argue that conventional wisdom may be wrong. First, the extent and effectiveness of income redistribution and poverty reduction, revenue-collection, and spending patterns vary so significantly across countries that speaking of ?Latin America? as a unity is misleading. The (after direct taxes and transfers) Gini, for example, declines by over 10 percent in Argentina but by only 2.4 percent in Bolivia. In Argentina, Brazil and Bolivia government revenues are close to 40 percent of GDP, whereas in Mexico and Peru they are around 20 percent. Social spending (excluding contributory pensions) as a share of GDP ranges from 17 percent in Brazil to 5.2 percent in Peru. Second, social spending does not accrue to the richest quintile. On the contrary, concentration coefficients for social spending are highly negative (progressive in absolute terms) for Argentina and slightly so for Bolivia and Mexico. In Brazil and Peru social spending is progressive in relative terms only. Third, there is no obvious correlation between the size of government and the size of social spending, on the one hand, and the extent and effectiveness of redistribution, on the other: government size is similar for Argentina and Bolivia but they are on opposite sides in terms of the extent of redistribution. Fourth, due to indirect taxes households are net payers to the ?fisc? beginning in the third decile in Bolivia and Brazil; for Argentina, Mexico and Peru this happens in the fifth decile. Fifth, corrective measures differ too: in Argentina, Bolivia and Brazil they may involve the reduction in revenues and total spending, while revenues and social spending (especially direct transfers to the poor) should be increased in Mexico and Peru. Bolivia and Brazil need to introduce changes to their tax and transfer system so that net payers to the ?fisc? start at higher incomes. All five countries need to improve the progressivity of their spending, including non-social spending components.
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Bibliographic InfoPaper provided by ECINEQ, Society for the Study of Economic Inequality in its series Working Papers with number 227.
Length: 61 pages
Date of creation: 2011
Date of revision:
fiscal incidence; fiscal policy; inequality; poverty; redistribution; social policy; taxes; transfers; Latin America; Argentina; Bolivia; Brazil; Mexico and Peru;
Other versions of this item:
- Nora Lustig & Carola Pessino & George Gray Molina & Wilson Jimenez & Veronica Paz & Ernesto Yanez & Claudiney Pereira & Sean Higgins & John Scott & Miguel Jaramillo, 2011. "Fiscal Policy and Income Redistribution in Latin America: Challenging the Conventional Wisdom," Working Papers, Tulane University, Department of Economics 1124, Tulane University, Department of Economics.
- D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
- H11 - Public Economics - - Structure and Scope of Government - - - Structure and Scope of Government
- H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence
- H5 - Public Economics - - National Government Expenditures and Related Policies
- I14 - Health, Education, and Welfare - - Health - - - Health and Inequality
- I24 - Health, Education, and Welfare - - Education - - - Education and Inequality
- I3 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty
- O15 - Economic Development, Technological Change, and Growth - - Economic Development - - - Economic Development: Human Resources; Human Development; Income Distribution; Migration
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-11-14 (All new papers)
- NEP-LAM-2011-11-14 (Central & South America)
- NEP-LTV-2011-11-14 (Unemployment, Inequality & Poverty)
- NEP-PBE-2011-11-14 (Public Economics)
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Blog mentionsAs found by EconAcademics.org, the blog aggregator for Economics research:
- Fiscal policy and income redistribution in Latin America: Challenging the conventional wisdom
by maximorossi in NEP-LTV blog on 2011-11-15 12:04:28
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