| Abstract: |
Using standard fiscal incidence analysis and the new methodological
developments by the Commitment to Equity (CEQ) Institute, this paper estimates
the impact of fiscal policy on inequality and poverty in sixteen countries in
Latin America around 2010. With information on incomes, consumption, and other
dimensions available in household surveys, and knowledge about the
characteristics of the fiscal system, the CEQ method consists in allocating to
each individual the burden of personal income and consumption taxes, and the
benefits from cash transfers, consumption subsidies, and government spending
on education and health. This process yields the pre-fiscal and post-fiscal
income concepts of interest. These income concepts, in turn, are used to
calculate the corresponding indicators of inequality and poverty. Thus, one
can estimate, for each country, the impact of the fiscal system and each of
its components on inequality and poverty. Since the methodology that was
applied is the same, results are comparable across countries. The countries
that redistribute the most are Argentina, Brazil, Costa Rica, and Uruguay.
Guatemala, Honduras, and Peru are the countries that redistribute the least.
Fiscal policy reduces extreme (income) poverty in twelve out of the sixteen
countries. The incidence of poverty after taxes, subsidies, and cash
transfers, however, is higher than market income poverty in Bolivia,
Guatemala, Honduras, and Nicaragua, even though fiscal policy reduces
inequality in these four countries. Contributory pensions have a heterogeneous
effect on inequality and, contrary to some expectations, their impact is
equalizing in nine of the countries. In the sixteen countries, spending on
pre-school and primary education is equalizing and pro-poor (per capita
benefits decline with income per capita). Spending on secondary education is
always equalizing; it is also pro-poor in some of the countries. Spending on
tertiary education is never pro-poor but it is equalizing in all the countries
except for Guatemala. Spending on health is always equalizing but pro-poor
only in some countries. Latin America presents a great deal of heterogeneity
in the size of the state and the countries’ capacity to use their fiscal
power to reduce inequality and poverty. A higher share of social spending (to
GDP) is associated with a larger redistributive effect but countries with
similar, or even lower, shares of social spending show heterogeneous
redistributive effects implying that other factors beyond size such as the
composition and targeting of social spending (and taxes) are at play. It is
important to emphasize that a higher redistributive effect is not necessarily
a desirable outcome since in this article there is no estimation of the impact
of redistributive policy on fiscal sustainability and efficiency. In some
countries, the burden of consumption taxes is such that a portion of the poor
are net payers into the fiscal system (before receiving "in kind" transfers in
education and health). Governments should examine whether this undesirable
effect could be avoided, or at least reduced, through an expansion of targeted
cash transfers and/or reduction in the consumption taxes that are particularly
burdensome for the poor. |