Abstract
How much do social spending and taxation contribute to achieving the goals of poverty reduction and expanding the access to education and health services among the poor? Standard fiscal incidence analyses applied to Argentina, Bolivia, Brazil, Mexico, Peru, and Uruguay using a comparable methodology yields the following results. Direct taxes and cash transfers reduce inequality and poverty by non-trivial amounts in Argentina, Brazil, and Uruguay but less so in Bolivia, Mexico, and Peru. In Bolivia and Brazil indirect taxes more than offset the poverty-reducing impact of cash transfers. When one includes the effect of in-kind transfers in education and health valued at government costs, they reduce inequality in all countries by considerably more than cash transfers. Spending on public education and health services is broadly pro-poor, with the exception of tertiary education and the health component of the social security system.
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Notes
For details on the project, country-coverage and available results, go to www.commitmentoequity.org.
It should be noted that the study for Argentina does not include the impact of taxes. Although the household survey in Argentina covers urban areas only, the analysis is taken to be representative for the whole country.
It is important to note that the methodological assumptions used in these studies correspond to the Lustig and Higgins CEQ Handbook version January 2013. To avoid confusion, only the most recent version is published online. The January 2013 version is available upon request.
Breceda et al. (2008) and, especially, Goñi et al. (2011), for example, rely more on secondary sources.
Some studies use consumption instead of income.
In practice, the sequence may be the opposite. For example, if what the survey reports is disposable income or consumption, one needs to subtract transfers and add taxes to get to market income.
For more details on the approaches to fiscal incidence analysis see, for example, Fullerton and Metcalf (2002) and Martinez-Vazquez (2008).
For more details on concepts and definitions, see Lustig and Higgins (2013).
Market income is sometimes called primary or ‘pre-fisc’ income; note that market income is not the same as ‘gross income’ since the latter includes government transfers and the former does not.
Taxes include non-pension social security contributions in the benchmark analysis and all social security contributions in the sensitivity analysis.
Argentina does not include a question on autoconsumption and in the case of Bolivia the results with autoconsumption are specious (e.g., Bolivia ends up with the same distribution of income as Uruguay and a lower rural poverty than Mexico) so we opted to not use them.
In the fiscal incidence literature, pensions from contributory systems have been sometimes treated as part of market income and other times as government transfers. Arguments exist both for treating contributory pensions as part of market income because they are deferred income (Breceda et al., 2008; Immervoll et al., 2009) and for treating them as a government transfer, especially in systems with a large subsidized component (Lindert et al., 2006; Goñi et al., 2011; Immervoll et al., 2009). Since this is an unresolved issue, in our study we defined a benchmark case in which contributory pensions are part of market income. We also performed a sensitivity analysis where pensions are classified under government transfers. The results presented here are for the benchmark analysis. An analysis of the effects of treating pensions as transfers is available under ‘Indicators’ in www.commitmentoequity.org. Other methodological aspects such as the definition of progressivity, tax shifting and tax evasion assumptions, tax and transfers allocation methods as well as information about the data sources can be found in Lustig et al. (2014). More detailed results of this sensitivity analysis are available upon request.
Since here we are treating contributory pensions as part of market income, the portion of the contributions to social security going towards pensions is treated as ‘saving’.
One may also include participation costs such as transportation costs or foregone incomes because of use of time in obtaining benefits. In our study, they were not included.
The studies exclude corporate and international trade taxes, some spending categories (such as infrastructure investments including urban services and rural roads that benefit the poor), and other public goods.
To put the results for these six Latin American countries in perspective, the average reduction in the disposable income Gini coefficient for advanced OECD countries equals 12 percentage points while the average for our six countries (which includes Argentina and Uruguay, possibly the most redistributive in the region) equals 3 percentage points. The average reduction in the final income Gini coefficient for OECD is 17 percentage points and for the six Latin American countries is 9 percentage points. Thus, in spite of the progress witnessed in terms of inequality and poverty reduction in the 2000s, Latin America still lags behind significantly in terms of redistribution achieved through taxation and social spending.
The comparatively ‘rosy’ redistributive picture of Argentina, Brazil, and Uruguay (by Latin American standards), however, hides some unpleasant facts. As discussed by Lustig and Pessino (2014), the problems with Argentina’s redistributive policies are mainly the allocation of non-social subsidies and fiscal sustainability. Total government spending on indirect subsidies equaled 5.6 percent of GDP in 2009 (incidence analysis did not include indirect subsidies), compared to the 3.7 percent of GDP spent on progressive cash transfers in 2009. These subsidies are primarily subsidies to agricultural producers, airlines, manufacturing, and transportation and energy. The first three are outright regressive (unequalizing) and their budget equaled 1.3 percent of GDP in 2009 (compared to 0.6 percent allocated to the Universal Family Allowance). In addition, Argentina’s sharp rise in public spending during the 2000s has been increasingly financed by distortionary taxes and unorthodox revenue-raising mechanisms. Moreover, the export tax – a major source of revenue – is highly sensitive to commodity prices. All in all, this points to the fact that the Argentine government has embarked on a redistribution process that – to some extent – generates unfair losses (to the formal sector retirees) and may not be fiscally sustainable unless subsidies accruing to the nonsocial sectors are significantly curbed.
A word of caution is in order. The indicators of inequality and poverty have some comparability issues for two main reasons. First, the assumptions to take into account indirect tax evasion differ somewhat across countries. Second, Peru did not include the impact of indirect subsidies in the incidence analysis; subsidies are reportedly quite small so this may not be a problem. Also, as stated above, Argentina is not strictly comparable with the rest because the study focuses only on the spending side.
For a definition of impoverishment, see Lustig and Higgins (2012).
For details, please see details in each country study in Lustig et al. (2014).
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Acknowledgements
This paper was prepared under the project Commitment to Equity led by Nora Lustig, the Commitment to Equity (CEQ) project was launched in 2008. The CEQ is a project of the Center for Inter-American Policy and the Department of Economics, Tulane University and its founding co-sponsor the Inter-American Dialogue. In April 2014, the Center for Global Development became a partner of CEQ. For more details please go to www.commitmentoequity.org. A very condensed version of this paper appeared as Lustig, Nora, Carola Pessino, and John Scott ‘The Impact of Taxes and Social Spending on Inequality and Poverty in Latin America: Argentina, Bolivia, Brazil, Mexico, Peru and Uruguay. Introduction to Special Issue,’ in Public Finance Review, May 2014, Volume 42, Issue 3. The values shown in this paper may differ from those that appear in the working papers posted at www.commitmentoequity.org. If they differ, those included here take precedence as the most updated values. The authors are very grateful to Dan Teles as well as to Nicole Florack and Juan Carlos Monterrey, for their excellent research assistantship in the preparation of this overview and the background papers. We also thank Samantha Greenspun, Emily Travis, and Dustin Wonnell who contributed to the project at various points in time.
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Explores how social spending and taxation contribute to achieving the goals of poverty reduction and expanding the access to education and health services among the poor
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Lustig, N. Income Redistribution and Poverty Reduction in Latin America: The role of social spending and taxation in achieving development goals. Development 57, 388–399 (2014). https://doi.org/10.1057/dev.2015.4
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DOI: https://doi.org/10.1057/dev.2015.4