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Can a Poverty-Reducing and Progressive Tax and Transfer System Hurt the Poor?

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  • Sean Higgins
  • Nora Lustig

Abstract

Whether the poor are helped or hurt by taxes and transfers is generally determined by comparing income distributions before and after fiscal policy using stochastic dominance tests and measures of progressivity and horizontal inequity. We formally show that these tools can fail to capture an important aspect: that a substantial proportion of the poor are made poorer (or non-poor made poor) by the tax and transfer system. We call this fiscal impoverishment, and axiomatically derive a measure of its extent. An analogous measure of fiscal gains of the poor is also derived, and we show that changes in the poverty gap can be decomposed into our axiomatic measures of fiscal impoverishment and gains. We also establish dominance criteria for unambiguous comparisons of fiscal impoverishment and gains under the current system to that under a proposed reform, for a range of possible poverty lines. We illustrate using Brazilian data.

Suggested Citation

  • Sean Higgins & Nora Lustig, 2015. "Can a Poverty-Reducing and Progressive Tax and Transfer System Hurt the Poor?," Working Papers 405, Center for Global Development.
    • Handle: RePEc:cgd:wpaper:405
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    2. Nora Lustig, 2016. "The Sustainable Development Goals, Domestic Resource Mobilization and the Poor," Commitment to Equity (CEQ) Working Paper Series 61, Tulane University, Department of Economics.
    3. Dalmacio & William Seitz & Jon Jellema & Maya Goldman, 2021. "The Effects of Fiscal Policy on Poverty and Inequality in Tajikistan," Commitment to Equity (CEQ) Working Paper Series 108, Tulane University, Department of Economics.
    4. Schaffitzel, Filip & Jakob, Michael & Soria, Rafael & Vogt-Schilb, Adrien & Ward, Hauke, 2020. "Can government transfers make energy subsidy reform socially acceptable? A case study on Ecuador," Energy Policy, Elsevier, vol. 137(C).
    5. Maya GOLDMAN & Ingrid WOOLARD & Jon JELLEMA, 2020. "The Impact of Taxes and Transfers on Poverty and Income Distribution in South Africa 2014/2015," Working Paper 148aae17-521b-428b-85de-b, Agence française de développement.
    6. Gupta, Sanjeev & Jalles, João Tovar, 2022. "Do tax reforms affect income distribution? Evidence from developing countries," Economic Modelling, Elsevier, vol. 110(C).
    7. Nga Thi Viet Nguyen & Ivica Rubil, 2021. "Fiscal Policies, Inequality, and Poverty in Croatia," Working Papers 2104, The Institute of Economics, Zagreb.
    8. Matěj Bajgar & Petr Janský & Klára Kalíšková, 2019. "The poor outside the lamplight: on the prevalence of poverty among population groups not included in household surveys," Post-Communist Economies, Taylor & Francis Journals, vol. 31(2), pages 181-199, March.
    9. Malerba, Daniele & Gaentzsch, Anja & Ward, Hauke, 2021. "Mitigating poverty: The patterns of multiple carbon tax and recycling regimes for Peru," Energy Policy, Elsevier, vol. 149(C).
    10. Adu-Ababio, Kwabena, 2024. "Microsimulation approaches to studying shocks and social protection in selected developing economies," Economic Analysis and Policy, Elsevier, vol. 84(C), pages 1552-1576.
    11. Combes, Jean-Louis & Debrun, Xavier & Minea, Alexandru & Sawadogo, Pegdéwendé Nestor & Vinturis, Cezara, 2025. "On the side effects of fiscal policy: Fiscal rules and income inequality," European Journal of Political Economy, Elsevier, vol. 90(PA).
    12. Li, Yali & Marquez, Ronald & Xie, Luhua & Li, Xinyi, 2025. "Evaluating the impact of special additional deductions policy on urban-rural household vulnerability: Insights from China Family Panel Studies," Economic Analysis and Policy, Elsevier, vol. 86(C), pages 839-857.
    13. Jon Jellema & Nora Lustig & Astrid Haas & Sebastian Wolf, 2016. "The Impact of Taxes, Transfers, and Subsidies on Inequality and Poverty in Uganda," Working Papers 1614, Tulane University, Department of Economics, revised Aug 2017.
    14. Nora Lustig, 2016. "The Sustainable Development Goals, Domestic Resource Mobilization and the Poor," Commitment to Equity (CEQ) Working Paper Series 1361, Tulane University, Department of Economics.
    15. Nora Lustig, 2016. "Commitment to Equity Handbook. A Guide to Estimating the Impact of Fiscal Policy on Inequality and Poverty," Commitment to Equity (CEQ) Working Paper Series 01, Tulane University, Department of Economics.

    More about this item

    Keywords

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    JEL classification:

    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • I32 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - Measurement and Analysis of Poverty

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