IDEAS home Printed from https://ideas.repec.org/p/tul/ceqwps/24.html
   My bibliography  Save this paper

Measuring the Distributional Impact of Taxation and Public Spending: The Practice of Fiscal Incidence Analysis

Author

Listed:
  • Nora Lustig

    (Stone Center for Latin American Studies, Department of Economics, Tulane University, Commitment to Equity Institute (CEQI))

Abstract

Taxation and public spending are key policy levers the state has in its power to change the distribution of income. One of the most commonly used methods to measure the distributional impact of a country’s taxes and public spending is fiscal incidence analysis. Rooted in the field of Public Finance, fiscal incidence analysis is the method utilized to allocate taxes and public spending to households so that one can compare incomes before taxes and transfers with incomes after them. Standard fiscal incidence analysis just looks at what is paid and what is received without assessing the behavioral responses that taxes and public spending may trigger on individuals or households. This is often referred to as the “accounting approach.” Although the theory is quite straightforward, its application can be fraught with complications. The salient ones are discussed here. While ignoring behavioral responses and general equilibrium effects is a limitation of the accounting approach, the effects calculated with this method are considered a reasonable approximation of the short-run welfare impact. Fiscal incidence analysis, however, can be designed to include behavioral responses as well as general equilibrium and inter-temporal effects. This article focuses on the implementation of fiscal incidence analysis using the accounting approach.

Suggested Citation

  • Nora Lustig, 2019. "Measuring the Distributional Impact of Taxation and Public Spending: The Practice of Fiscal Incidence Analysis," Commitment to Equity (CEQ) Working Paper Series 24, Tulane University, Department of Economics.
  • Handle: RePEc:tul:ceqwps:24
    as

    Download full text from publisher

    File URL: http://repec.tulane.edu/RePEc/ceq/ceq24.pdf
    File Function: First version, 2019
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    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.
    2. François Bourguignon & Amedeo Spadaro, 2006. "Microsimulation as a tool for evaluating redistribution policies," The Journal of Economic Inequality, Springer;Society for the Study of Economic Inequality, vol. 4(1), pages 77-106, April.
    3. Saavedra-Chanduví, Jaime & Molinas, José R. & De Barros, Ricardo Paes & Ferreira, Francisco H. G., 2011. "Measuring Inequality of Opportunities in Latin America and the Caribbean," IDB Publications (Books), Inter-American Development Bank, number 361.
    4. François Bourguignon, 2015. "The Globalization of Inequality," Economics Books, Princeton University Press, edition 1, number 10433.
    5. Raj Chetty & Adam Looney & Kory Kroft, 2009. "Salience and Taxation: Theory and Evidence," American Economic Review, American Economic Association, vol. 99(4), pages 1145-1177, September.
    6. Adriana Camacho & Emily Conover & Alejandro Hoyos, 2014. "Effects of Colombia's Social Protection System on Workers' Choice between Formal and Informal Employment," World Bank Economic Review, World Bank Group, vol. 28(3), pages 446-466.
    7. Mr. Kangni R Kpodar & Moataz El-Said & Mr. David Coady & Mr. Paulo A Medas & David Locke Newhouse & Mr. Robert Gillingham, 2006. "The Magnitude and Distribution of Fuel Subsidies: Evidence from Bolivia, Ghana, Jordan, Mali, and Sri Lanka," IMF Working Papers 2006/247, International Monetary Fund.
    8. Ricardo Paes de Barros & Francisco H.G. Ferreira & Jose R. Molinas Vega & Jaime Saavedra Chanduvi, 2009. "Measuring Inequality of Opportunities in Latin America and the Caribbean," World Bank Publications, The World Bank, number 2580, September.
    9. Cabrera, Maynor & Lustig, Nora & Morán, Hilcías E., 2015. "Fiscal Policy, Inequality, and the Ethnic Divide in Guatemala," World Development, Elsevier, vol. 76(C), pages 263-279.
    10. repec:idb:brikps:60098 is not listed on IDEAS
    11. Shaohua Chen & Martin Ravallion, 2010. "The Developing World is Poorer than We Thought, But No Less Successful in the Fight Against Poverty," The Quarterly Journal of Economics, Oxford University Press, vol. 125(4), pages 1577-1625.
    12. Sandra R. Baum, 1987. "On the Measurement of Tax Progressivity: Relative Share Adjustment," Public Finance Review, , vol. 15(2), pages 166-187, April.
    13. Anthony B. Atkinson & Joseph E. Stiglitz, 2015. "Lectures on Public Economics Updated edition," Economics Books, Princeton University Press, edition 2, number 10493.
    14. James Alm & Fitzroy Lee & Sally Wallace, 2005. "How fair? Changes in federal income taxation and the distribution of income, 1978 to 1998," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 24(1), pages 5-22.
    15. A.B. Atkinson & F. Bourguignon (ed.), 2000. "Handbook of Income Distribution," Handbook of Income Distribution, Elsevier, edition 1, volume 1, number 1, 00.
    16. Shamma A. Alam & Gabriela Inchauste & Umar Serajuddin, 2017. "The Distributional Impact of Fiscal Policy in Jordan," Commitment to Equity (CEQ) Working Paper Series 44, Tulane University, Department of Economics.
    17. Armando Barrientos & Rachel Sabatés-Wheeler, 2009. "Do transfers generate local economy effects?," Global Development Institute Working Paper Series 10609, GDI, The University of Manchester.
    18. Willem Adema & Maxime Ladaique, 2005. "Net Social Expenditure, 2005 Edition: More Comprehensive Measures of Social Support," OECD Social, Employment and Migration Working Papers 29, OECD Publishing.
    19. Beckerman, W, 1979. "The Impact of Income Maintenance Payments on Poverty in Britain, 1975," Economic Journal, Royal Economic Society, vol. 89(354), pages 261-279, June.
    20. Atkinson, Anthony B., 2015. "Inequality: what can be done?," LSE Research Online Documents on Economics 101810, London School of Economics and Political Science, LSE Library.
    21. Maynor Cabrera, Nora Lustig, and Hilcías E. Morán, 2015. "Fiscal Policy, Inequality, and the Ethnic Divide in Guatemala - Working Paper 397," Working Papers 397, Center for Global Development.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Paul A. Lewin & Bruce A. Weber, 2020. "Distributional impacts of food assistance: How SNAP payments to the rural poor affect incomes in the urban core," Papers in Regional Science, Wiley Blackwell, vol. 99(5), pages 1281-1300, October.
    2. Sarah Tougher & Kara Hanson & Catherine A. Goodman, 2021. "Does subsidizing the private for‐profit sector benefit the poor? Evidence from national antimalarial subsidies in Nigeria and Uganda," Health Economics, John Wiley & Sons, Ltd., vol. 30(10), pages 2510-2530, September.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Nora Lustig, 2018. "Measuring the Distribution of Household Income, Consumption and Wealth: State of Play and Measurement Challenges," Working Papers 1801, Tulane University, Department of Economics.
    2. 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 1301, Tulane University, Department of Economics.
    3. 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.
    4. Sean Higgins & Nora Lustig & Whitney Ruble & Timothy Smeeding, 2013. "Comparing the incidence of taxes and social spending in Brazil and the United States," Commitment to Equity (CEQ) Working Paper Series 1316, Tulane University, Department of Economics.
    5. Nora Lustig, 2017. "Fiscal Policy, Income Redistribution and Poverty Reduction in Low and Middle Income Countries," Commitment to Equity (CEQ) Working Paper Series 54, Tulane University, Department of Economics.
    6. Sean Higgins & Nora Lustig & Whitney Ruble & Timothy M. Smeeding, 2016. "Comparing the Incidence of Taxes and Social Spending in Brazil and the United States," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 62(S1), pages 22-46, August.
    7. Nora Lustig, 2016. "Fiscal policy, inequality, and the poor in the developing world," WIDER Working Paper Series wp-2016-164, World Institute for Development Economic Research (UNU-WIDER).
    8. Cabrera, Maynor & Lustig, Nora & Morán, Hilcías E., 2015. "Fiscal Policy, Inequality, and the Ethnic Divide in Guatemala," World Development, Elsevier, vol. 76(C), pages 263-279.
    9. Nora Lustig, 2016. "Fiscal policy, inequality and the poor in the developing world," Working Papers 418, ECINEQ, Society for the Study of Economic Inequality.
    10. Higgins, Sean & Lustig, Nora, 2016. "Can a poverty-reducing and progressive tax and transfer system hurt the poor?," Journal of Development Economics, Elsevier, vol. 122(C), pages 63-75.
    11. Francisco G. Ferreira & Nora Lustig & Daniel Teles, 2015. "Appraising cross-national income inequality databases: An introduction," The Journal of Economic Inequality, Springer;Society for the Study of Economic Inequality, vol. 13(4), pages 497-526, December.
    12. Himanshu, 2019. "Inequality in India: A review of levels and trends," WIDER Working Paper Series wp-2019-42, World Institute for Development Economic Research (UNU-WIDER).
    13. Alari Paulus & Holly Sutherland & Iva Tasseva, 2020. "Indexing Out of Poverty? Fiscal Drag and Benefit Erosion in Cross‐National Perspective," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 66(2), pages 311-333, June.
    14. Rolf Aaberge & François Bourguignon & Andrea Brandolini & Francisco H. G. Ferreira & Janet C. Gornick & John Hills & Markus Jäntti & Stephen P. Jenkins & Eric Marlier & John Micklewright & Brian Nolan, 2017. "Tony Atkinson and his Legacy," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 63(3), pages 411-444, September.
    15. Nora Lustig, 2020. "Inequality and Social Policy in Latin America," Working Papers 2011, Tulane University, Department of Economics.
    16. Nora Lustig, 2020. "Inequality and Social Policy in Latin America," Commitment to Equity (CEQ) Working Paper Series 94, Tulane University, Department of Economics.
    17. 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.
    18. Nora Lustig, 2016. "Fiscal policy, inequality, and the poor in the developing world," WIDER Working Paper Series 164a, World Institute for Development Economic Research (UNU-WIDER).
    19. Nora Lustig, 2017. "Fiscal Policy, Income Redistribution and Poverty Reduction in Low and Middle Income Countries," Commitment to Equity (CEQ) Working Paper Series 1354, Tulane University, Department of Economics.
    20. Sean Higgins & Nora Lustig, 2015. "Can Poverty-Reducing and Progressive Tax and Transfer System Hurt the Poor?," Commitment to Equity (CEQ) Working Paper Series 1333, Tulane University, Department of Economics.

    More about this item

    Keywords

    Fiscal incidence; taxation; social spending; transfers; pensions; progressivity; distributional effects; inequality; poverty; marginal contribution; effectiveness; valuing in-kind transfers.;
    All these keywords.

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence
    • I32 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - Measurement and Analysis of Poverty
    • I38 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - Government Programs; Provision and Effects of Welfare Programs

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:tul:ceqwps:24. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: . General contact details of provider: https://edirc.repec.org/data/detulus.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Nora Lustig (email available below). General contact details of provider: https://edirc.repec.org/data/detulus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.