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Fiscal Policy, Income Redistribution and Poverty Reduction in Low and Middle Income Countries - Working Paper 448

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  • Nora Lustig

Abstract

Current policy discussion focuses primarily on the power of fiscal policy to reduce inequality. Yet, comparable fiscal incidence analysis for 28 low and middle income countries reveals that, although fiscal systems are always equalizing, that is not always true for poverty. In Ethiopia, Tanzania, Ghana, Nicaragua, and Guatemala the extreme poverty headcount ratio is higher after taxes and transfers (excluding in-kind transfers) than before. In addition, to varying degrees, in all countries a portion of the poor are net payers into the fiscal system and are thus impoverished by the fiscal system. Consumption taxes are the main culprits of fiscally-induced impoverishment. Net direct taxes are always equalizing and indirect taxes net of subsidies are equalizing in nineteen countries of the 28. While spending on pre-school and primary school is pro-poor (i.e., the per capita transfer declines with income) in almost all countries, pro-poor secondary school spending is less prevalent, and tertiary education spending tends to be progressive only in relative terms (i.e., equalizing but not pro-poor). Health spending is always equalizing but not always pro-poor. More unequal countries devote more resources to redistributive spending and appear to redistribute more. The latter, however, is not a robust result across specifications.

Suggested Citation

  • Nora Lustig, 2017. "Fiscal Policy, Income Redistribution and Poverty Reduction in Low and Middle Income Countries - Working Paper 448," Working Papers 448, Center for Global Development.
  • Handle: RePEc:cgd:wpaper:448
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    File URL: https://www.cgdev.org/publication/fiscal-policy-income-redistribution-and-poverty-reduction-low-and-middle-income
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    Cited by:

    1. repec:kap:itaxpf:v:25:y:2018:i:5:d:10.1007_s10797-018-9487-2 is not listed on IDEAS
    2. Maboshe Mashekwa & Woolard Ingrid, 2018. "Revisiting the impact of direct taxes and transfers on poverty and inequality in South Africa," WIDER Working Paper Series 79, World Institute for Development Economic Research (UNU-WIDER).

    More about this item

    Keywords

    fiscal incidence; social spending; inequality; poverty; developing countries;

    JEL classification:

    • H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence
    • H5 - Public Economics - - National Government Expenditures and Related Policies
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • I3 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty

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