nep-lam New Economics Papers
on Central and South America
Issue of 2017‒09‒03
three papers chosen by
Maximo Rossi
Universidad de la República

  1. The Impact of Taxes and Social Spending on Income Distribution and Poverty in Latin America. An Application of the Commitment to Equity (CEQ) Methodology By Nora Lustig
  2. The impact of taxes and social spending on inequality and poverty in El Salvador By Margarita Beneke; Nora Lustig; Jose Andres Oliva
  3. On the Middle 70%. The Impact of Fiscal Policy on the Emerging Middle Class in Latin America usting Commitment to Equity. By Christian Daude; Nora Lustig; Angel Melguizo; Jose Ramon Perea

  1. By: Nora Lustig (Department of Economics, Tulane University)
    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.
    Keywords: Incidencia fiscal, desigualdad, pobreza, impuestos, transferencias, America Latina
    JEL: D31 H22 I38
    Date: 2017–08
    URL: http://d.repec.org/n?u=RePEc:tul:wpaper:1714&r=lam
  2. By: Margarita Beneke (FUSADES, El Salvador); Nora Lustig (Department of Economics, Tulane University); Jose Andres Oliva (FUSADES, El Salvador)
    Abstract: We conducted a fiscal impact study to estimate the effect of taxes, social spending, and subsidies on inequality and poverty in El Salvador, using the CEQ methodology. Taxes are progressive, but given their volume, their impact is limited. Direct transfers are concentrated on poor households, but their budget is small so their effect is limited; a significant portion of the subsidies goes to households in the upper income deciles, so although their budget is greater, their impact is low. The component that has the greatest effect on inequality is spending on education and health. Therefore, the impact of fiscal policy is limited and low when compared with other countries with a similar level of per capita income. There is room for improvement using current resources.
    Keywords: fiscal incidence, poverty, inequality, El Salvador
    JEL: D31 H22 I14
    Date: 2017–08
    URL: http://d.repec.org/n?u=RePEc:tul:wpaper:1709&r=lam
  3. By: Christian Daude (Development Bank of Latin America - CAF); Nora Lustig (Stone Center for Latin American Studies, Department of Economics, Tulane University, Commitment to Equity Institute (CEQI).); Angel Melguizo (OECD Development Centre); Jose Ramon Perea (World Bank)
    Abstract: This paper analyzes the effects of indirect and direct taxes, as well as monetary and in-kind transfers on the income distribution in nine Latin American countries applying the CEQ methodology and using household and expenditure microdata around 2010. In particular, we focus on the effect of fiscal policies on two groups of the emerging middle class: the vulnerable and the middle class. We find that while the vulnerable tend to be net receivers in fiscal terms, especially when including in-kind transfers, the middle class seems to be mainly a net payer. This might be aggravated by the perception of a relatively low quality of in-kind transfers, notably in education and health-care services. We provide some evidence based on subjective surveys pointing in this direction.
    Keywords: middle class, tax-benefit analysis, fiscal incidence, fiscal mobility
    JEL: D31 H22 H50 I30
    Date: 2017–08
    URL: http://d.repec.org/n?u=RePEc:tul:ceqwps:72&r=lam

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