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Fiscal policy and income redistribution in Latin America: Challenging the conventional wisdom


  • Nora Lustig

    () (Commitment to Equity Initiative (CEQ), Inter-American Dialogue and Tulane University)


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

Suggested Citation

  • Nora Lustig, 2011. "Fiscal policy and income redistribution in Latin America: Challenging the conventional wisdom," Working Papers 227, ECINEQ, Society for the Study of Economic Inequality.
  • Handle: RePEc:inq:inqwps:ecineq2011-227

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    References listed on IDEAS

    1. Engel, Eduardo M. R. A. & Galetovic, Alexander & Raddatz, Claudio E., 1999. "Taxes and income distribution in Chile: some unpleasant redistributive arithmetic," Journal of Development Economics, Elsevier, vol. 59(1), pages 155-192, June.
    2. Nora Lustig, 2011. "Commitment to Equity Assessment (CEQ): A Diagnostic Framework to Assess Governments' Fiscal Policies Handbook," Working Papers 1122, Tulane University, Department of Economics.
    3. 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.
    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 18:04:28


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    Cited by:

    1. Cruces Guillermo & Fields Gary S. & Jaume David & Viollaz Mariana, 2015. "The growth-employment-poverty nexus in Latin America in the 2000s: Bolivia country study," WIDER Working Paper Series 070, World Institute for Development Economic Research (UNU-WIDER).
    2. repec:tul:ceqwps:1304 is not listed on IDEAS
    3. Verónica Paz Arauco & George Gray Molina & Wilson Jiménez Pozo & Ernesto Yáñez Aguilar, 2012. "Explaining low redistributive impact in Bolivia," Commitment to Equity (CEQ) Working Paper Series 06, Tulane University, Department of Economics, revised Apr 2013.
    4. Nora Lustig & Sean Higgins, 2012. "Fiscal Incidence, Fiscal Mobility and the Poor: A New Approach," Working Papers 1202, Tulane University, Department of Economics.
    5. Nora Lustig, 2015. "Fiscal Policy and Ethno-Racial Inequality in Bolivia, Brazil, Guatemala and Uruguay," Commitment to Equity (CEQ) Working Paper Series 22, Tulane University, Department of Economics.
    6. Cornia, Giovanni Andrea & Martorano, Bruno, 2011. "A New Fiscal Pact, Tax Policy Changes and Income Inequality," WIDER Working Paper Series 070, World Institute for Development Economic Research (UNU-WIDER).
    7. Fernando Augusto Mansor De Mattos & Natassia Nascimento, 2016. "Aspectos Históricos Dos Efeitos Da Evolução Do Salário Mínimo, Do Mercado De Trabalho E Da Estrutura Tributária Sobre O Perfil Distributivo Brasileiro Desde Meados Do Século Xx," Anais do XLIII Encontro Nacional de Economia [Proceedings of the 43rd Brazilian Economics Meeting] 033, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics].
    8. Paddy Carter & Alex Cobham, 2016. "Are taxes good for your health?," WIDER Working Paper Series 171, World Institute for Development Economic Research (UNU-WIDER).
    9. World Bank, 2013. "Managing Medium-Term Fiscal Challenges," World Bank Other Operational Studies 16573, The World Bank.
    10. Cuesta, Jose, 2014. "Social Spending, Distribution, and Equality of Opportunities: The Opportunity Incidence Analysis," World Development, Elsevier, vol. 62(C), pages 106-124.

    More about this item


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

    JEL classification:

    • 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, Innovation, Technological Change, and Growth - - Economic Development - - - Economic Development: Human Resources; Human Development; Income Distribution; Migration

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