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Fiscal policy, income redistribution and poverty reduction in low and middle income countries

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  • Nora Lustig

    (Tulane University)

Abstract

Current policy discussion focuses primarily on the power of fiscal policy to reduce inequality. Yet, comparable fiscal incidence analysis for twenty-eight 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 twenty-eight. 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 Papers 428, ECINEQ, Society for the Study of Economic Inequality.
  • Handle: RePEc:inq:inqwps:ecineq2017-428
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    References listed on IDEAS

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    1. Marisa Bucheli & Nora Lustig & Máximo Rossi & Florencia Amábile, 2012. "Social Spending, Taxes and Income Redistribution in Uruguay," Documentos de Trabajo (working papers) 1212, Department of Economics - dECON.
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    Cited by:

    1. Mashekwa Maboshe & Ingrid Woolard, 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).
    2. Richard M. Bird, 2018. "Are global taxes feasible?," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 25(5), pages 1372-1400, October.

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    More about this item

    Keywords

    fiscal incidence; social spending; inequality; poverty; developing countries.;
    All these keywords.

    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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