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Fiscal Policy and Income Redistribution in Latin America: Challenging the Conventional Wisdom

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Author Info

  • Nora Lustig

    ()
    (Department of Economics, Tulane University)

  • Carola Pessino

    ()
    (School of Government and Executive Director, Centro de Investigaciones y Evaluación en Economía Social para el Alivio de la Pobreza, Universidad Torcuato Di Tella, Buenos Aires, Argentina)

  • George Gray Molina

    ()
    (Chief Economist for UNDP-Latin America and the Caribbean, New York, New York)

  • Wilson Jimenez
  • Veronica Paz

    ()

  • Ernesto Yanez

    ()

  • Claudiney Pereira

    ()
    (Department of Economics, Tulane University)

  • Sean Higgins

    ()
    (Department of Economics, Tulane University)

  • John Scott

    ()
    (CIDE (Centro de Investigación y Docencia Económicas), Mexico and,Consejero Académico, CONEVAL (Consejo Nacional de Evaluación de la Política de Desarrollo Social), Mexico)

  • Miguel Jaramillo

    ()
    (GRADE (Grupo de Análisis para el Desarrollo), Peru)

Abstract

Conventional 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 of progressivity of their spending, including non-social spending components.

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Bibliographic Info

Paper provided by Tulane University, Department of Economics in its series Working Papers with number 1124.

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Length: 60 pages
Date of creation: Oct 2011
Date of revision:
Handle: RePEc:tul:wpaper:1124

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Keywords: fiscal incidence; fiscal policy; inequality; poverty; redistribution; social policy; taxes; transfers; Latin America; Argentina; Bolivia; Brazil; Mexico and Peru;

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References

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  1. Karla Breceda & Jamele Rigolini & Jaime Saavedra, 2009. "Latin America and the Social Contract: Patterns of Social Spending and Taxation," Population and Development Review, The Population Council, Inc., vol. 35(4), pages 721-748.
  2. Eduardo Engel & Alexander Galetovic & Claudio Raddatz, 1998. "Taxes and Income Distribution in Chile: Some Unpleasant Redistributive Arithmetic," Documentos de Trabajo 41, Centro de Economía Aplicada, Universidad de Chile.
  3. Nora Lustig, 2011. "Commitment to Equity Assessment (CEQ). A diagnostic framework to assess governments’ fiscal policies. Handbook," Working Papers 212, ECINEQ, Society for the Study of Economic Inequality.
  4. Dillon Alleyne & James Alm & Roy Bahl & Sally Wallace, 2004. "Tax Burden in Jamaica," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper0434, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
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  1. 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

RePEc Biblio mentions

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  1. > Political Economy > The Political Economy of Latin America
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Cited by:
  1. Cornia, Giovanni Andrea & Martorano, Bruno, 2011. "A New Fiscal Pact, Tax Policy Changes and Income Inequality," Working Paper Series UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
  2. Nora Lustig & Sean Higgins, 2012. "Fiscal Incidence, Fiscal Mobility and the Poor: a New Approach," Working Papers 265, ECINEQ, Society for the Study of Economic Inequality.

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  1. Nora Lustig in Wikipedia (English)

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