La era de la desigualdad (¿consecuencia directa del "imperialismo monetario"?) – Parte III (página 2)

Both tax and expenditure policies need to be carefully designed to balance distributional and efficiency objectives, including during fiscal consolidation. The appropriate mix of instruments will depend on administrative capacity, as well as on society"s preferences for redistribution, the role envisaged for the state, and political economy considerations. Options for redistributive policies that help minimize efficiency costs, in terms of their effects on incentives to work and save, are the following:

? In advanced economies: (i) using means-testing, with a gradual phasing out of benefits as incomes rise to avoid adverse effects on employment; (ii) raising retirement ages in pension systems, with adequate provisions for the poor whose life expectancy could be shorter; (iii) improving the access of lower-income groups to higher education and maintaining access to health services; (iv) implementing progressive personal income tax (PIT) rate structures; and (v) reducing regressive tax exemptions.

? In developing economies: (i) consolidating social assistance programs and improving targeting; (ii) introducing and expanding conditional cash transfer programs as administrative capacity improves; (iii) expanding noncontributory means-tested social pensions; (iv) improving access of low-income families to education and health services; and (v) expanding coverage of the PIT. Innovative approaches, such as the greater use of taxes on property and energy (such as carbon taxes) could also be considered in both advanced and developing economies.

Introduction

1. Income inequality has increased in both advanced and developing economies in recent decades. Increasing inequality has been attributed to a range of factors, including the globalization and liberalization of factor and product markets; skill-biased technological change; increases in labor force participation by low-skilled workers; declining top marginal income tax rates; increasing bargaining power of high earners; and the growing share of high-income couples and single-parent households (OECD, 2008; Alvaredo and others, 2013; Hoeller, Joumard, and Koske, 2014). Many of these developments have had beneficial effects on growth and poverty reduction both nationally and globally (Chen and Ravallion, 2010; Milanovic, 2012).

2. There is growing evidence that high income inequality can be detrimental to achieving macroeconomic stability and growth. Recent empirical work finds that high levels of inequality are harmful for the pace and sustainability of growth (Ostry, Berg, and Tsangarides, forthcoming). Others have argued that rising inequality may have been an important contributing factor to the global financial crisis. Moreover, evidence from public surveys in various countries indicates that widening income inequality has been accompanied by growing public demand for income redistribution, especially in countries most strongly affected by the crisis. This comes at a time when high public debt ratios in the advanced economies, and emerging vulnerabilities in the developing economies, have made fiscal restraint an important priority, and point to the importance of sensitivity to distributional concerns in designing consolidation packages. In this light, income inequality can be of macroeconomic concern for country authorities, and the Fund should accordingly seek to understand the macroeconomic effects of inequality. In addition, in its policy advice, the Fund should be mindful of how macroeconomic policies (including fiscal policies) affect income distribution and their consistency with the distributional goals of country authorities.

3. Fiscal policy is the primary tool for governments to affect income distribution. Fiscal policy has three main objectives -to support macroeconomic stability, provide public goods and correct market failures, and redistribute income. Both tax and spending policies can alter the distribution of income, both over the short and medium term. For example, in-kind benefits, such as education spending, can affect the inequality of market incomes (i.e., incomes before taxes and transfers) through their impact on future earnings. Other fiscal instruments, such as income taxes and cash transfers, can reduce the inequality of disposable incomes (i.e., incomes after direct taxes and transfers), including indirectly via their impact on market incomes due to work and savings responses.

4. The Fund has long recognized the nexus between income distribution and fiscal policy. In the late 1980s there was growing recognition and discussion of the potential effects of macroeconomic and structural adjustment programs on poverty and inequality, including by the IMF"s Executive Board (IMF, 1995). These discussions highlighted the importance of social safety nets to protect the poor and safeguard their access to essential public services, such as primary education and healthcare. Guidance notes from management on how income distribution and social expenditures should be addressed by staff, in the context of the Fund"s mandate, were issued in the mid-1990s (IMF, 1996, 1997). The Fund also expanded its analytical work in this area, drawing on contributions from leading academics (Tanzi and Chu, 1998; Tanzi, Chu, and Gupta, 1999). The growing attention of the Fund to the impact of fiscal policy on the poor was also reflected in the creation of the Poverty Reduction and Growth Facility (later PRGT) in the late 1990s, which emphasized the importance of pro-poor government budgets. More recently, the work on fiscal policy and equity was revived (Bastagli, Coady, and Gupta, 2012) and subsequently broadened to cover jobs and growth; a guidance note on the latter was issued to Fund staff (IMF, 2013a). The macroeconomic gains from greater gender equity, and fiscal policies to help achieve this, have also been addressed in recent work (Elborgh-Woytek and others, 2013).

5. Against the background of recent trends in income distribution and experience with the use of redistributive fiscal instruments in both advanced and developing economies, this paper explores how a society"s distributional objectives can be achieved in the most efficient manner. Redistributive fiscal policies can affect private decisions in various ways, including decisions to seek employment, to increase labor effort, and to save and invest. These, in turn, can potentially affect both the level and growth of economic activity, either positively and negatively. Given the Fund"s mandate to promote growth and stability, it is important that the potential tradeoffs or complementarities between fiscal redistribution and growth are well understood. In particular, there is a need to identify fiscal instruments that achieve distributional objectives at a minimum cost to economic efficiency. In doing so, the paper draws extensively on country experience, as discussed in the literature, as well as in IMF technical assistance reports. The paper also discusses how fiscal policies can protect households from poverty.

6. This paper does not advocate any particular redistributive goal or policy instrument for fiscal redistribution. The motivation for the paper is to provide guidance to policymakers on options to achieve their desired level of redistribution in the most efficient manner. The paper does not provide guidance on the optimal degree of fiscal redistribution, which is country-specific and depends, among other factors, on preferences for the role of the state and the costs involved in meeting goals for redistribution…

7. The structure of the paper is as follows. The next section describes trends in inequality across advanced and developing economies. The discussion covers inequality of incomes and wealth. It also examines the evidence on the persistence of income inequality across generations, an indicator of equality of opportunity. This is followed by a review of empirical evidence on the redistributive impact of fiscal policies and the extent to which fiscal policy can explain differences in inequality across countries and over time. The paper next focuses on the overall design of redistributive fiscal policy as well as of specific tax and spending instruments, and how these can be designed to minimize the efficiency costs of redistribution. The final section discusses the redistributive impact of fiscal consolidation, which can affect inequality both in the long run through channels explained in earlier sections and through its short-run effects on output and employment.

Trends in inequality

8. Economic inequality can be viewed from different perspectives. Each of these can provide insights into the nature, causes, and consequences of economic inequality.

? Inequality of income: This focuses on the inter-personal distribution of income, which captures how individual or household incomes are distributed across the population at a point in time.

? Inequality of wealth: Here the focus is on the distribution of wealth across individuals or households, which reflects differences in savings as well as bequests and inheritances.

? Lifetime inequality: This focuses on measuring inequality in incomes or earnings for an individual over his or her lifetime, rather than for a single year.

? Inequality of opportunity: This focuses on the relationship between income inequality and social mobility, in particular the extent of mobility between income groups across generations.

A. Inequality of Income

9. Over the last three decades, inequality in the personal distribution of income has increased in most economies. Figure 1 presents trends in the average (unweighted) Gini coefficient for disposable incomes (i.e., market incomes minus direct taxes plus cash transfers) across regions over recent decades -which reflects both the inequality of market-determined incomes as well as the distributional impact of income taxes and public transfers. The Gini coefficient ranges between 0 (denoting complete equality) and 1 (denoting complete inequality). Between 1990 and 2010, the Gini for disposable income has increased in nearly all advanced and emerging European economies. Over one-third of advanced economies and half of emerging Europe experienced increases in their Ginis exceeding 3 percentage points, with most of the increases in emerging Europe occurring between 1990 and 1995 during the early years of their transition to market-based systems. Inequality also rose in most economies in Asia and the Pacific and in Middle East and North Africa. While average inequality fell in sub-Saharan Africa over this period, it still rose by more than 3 percentage points in more than one-fourth of these economies. Inequality also increased in over one-third of the economies in Latin America, although on average there was a slight decline. However, since 2000 there has been a substantial decline in the Gini in nearly all countries in this region. This increase in inequality across the globe has also been accompanied by a widespread rise in public support for redistribution.

Note: Disposable income is income available to finance consumption once income taxes and public transfers have been netted out. Therefore, the distributional impacts of indirect taxes and in-kind transfers are not included. The Gini coefficient ranges between 0 (complete equality) and 1 (complete inequality). Number of countries in parentheses.

10. More striking than changes in inequality within regions are the persistent differences across regions. For instance, between 1990 and 2010, average inequality in each region changed by less than 3¼ percentage points. In contrast, average inequality in the two most unequal regions (sub-Saharan Africa and Latin America) remained 12 percentage points higher than the two most equal regions (emerging Europe and advanced economies). As the following section shows, a large proportion of the differences in regional average disposable income inequalities can be explained by differences in fiscal policies, especially in the levels and composition of taxes and spending.

11. More recently, the public debate has focused on the sharp increase in the share of total income going to top income groups. Over the last three decades the market income shares of the richest one-percent of the population have increased substantially in English-speaking advanced economies, as well as in China and India (Figure 2). For example, in the United States, the share of market income captured by the richest 10 percent surged from around 30 percent in 1980 to 48 percent by 2012, while the share of the richest one-percent increased from 8 percent to 19 percent. Even more striking is the fourfold increase in the income share of the richest 0.1 percent, from 2.6 percent to 10.4 percent. There has been substantial variation across countries in how much the share of the highest income groups has risen. The increase in the share of the top one-percent has been much less pronounced in Southern European and Nordic economies, and hardly any increases have been observed in continental Europe and Japan. While there is broad consensus about these trends, there is much less consensus on the factors driving them. Some emphasize the impact of new technologies and globalization on the supply and demand for skills (e.g., Goldin and Katz, 2008; Mankiw, 2013) -which can be expected to affect all economies- while others have highlighted the role of policy choices, such as reductions in top income tax rates. Rent-seeking behavior of top executives (at the expense of other incomes) and wealth accumulation have also been identified as factors behind the rising share at the top (see Stiglitz, 2012; Alvaredo and others, 2013)…

B. Inequality of Wealth

13. In advanced economies, household net wealth -financial assets and real estate minus debt- has increased substantially over the last four decades. Assessment of trends in this area requires caution, given the limited number of economies with comprehensive data. Internationally comparable data for eight large advanced economies show that the average ratio of net household wealth to national income grew by almost 80 percent between 1970 and 2010 (Piketty and Zucman, 2013). The largest increase was observed in Italy (by 180 percent) and the smallest increase was in the United States (by 21 percent). Explanations for the rapid growth in wealth include asset-price booms and a significant increase in private savings.

14. Wealth is more unequally distributed than income. The Gini coefficient of wealth in a sample of 26 advanced and developing economies in the early 2000s was 0.68, compared to a Gini of 0.36 for disposable incomes (Figure 4). The share of wealth held by the top 10 percent ranges from slightly less than half in Chile, China, Italy, Japan, Spain, and the United Kingdom, to more than two-thirds in Indonesia, Norway, Sweden, Switzerland, and the United States. In Switzerland and the United States, where wealth is most unequally distributed, the top one-percent alone holds more than one-third of total household wealth.

15. The inequality of wealth has risen in recent decades in several advanced economies. For instance, between the mid-1980s and early-2000s, the growth of wealth in Canada and Sweden was all concentrated in the two upper deciles of the wealth distribution. During the same period, the Gini coefficients of wealth distribution in Finland and Italy rose from around 0.55 to above 0.6. In the United States, the Gini coefficient of wealth distribution rose from 0.80 in the early-1980s to almost 0.84 in 2007.

16. Non-financial assets represent a large share of household wealth. Survey data suggest that non-financial assets -such as primary residences and other real estate-represent between 70 and 90 percent of total household gross wealth in advanced economies. In developing economies, this share is even larger: e.g., in the early 2000s it exceeded 90 percent in India and Indonesia (Davies and others, 2008). Financial wealth is generally more unequally distributed than real estate: for example, Fredriksen (2012) reports that the Gini coefficient for financial wealth (on average 0.8 for a group of seven advanced countries) exceeds that for non-financial wealth (0.63).

C. Lifetime Inequality

17. Empirical studies suggest that lifetime inequality is usually lower than inequality in any given year. This occurs for two reasons. First, in many economies, individuals experience significant fluctuations in incomes from year to year. Because of this, an individual who has relatively high income in one year may not necessarily have high incomes over their entire lifetime, relative to his or her peers of the same age. Bowlus and Robin (2012) find that because of this "earnings mobility" from one year to the next, the lifetime inequality of income is about 20-30 percent lower than annual income inequality in Canada, the United Kingdom, and the United States. In France and

Germany, lifetime inequality is similar to that of annual income. Second, lifetime incomes also tend to be less unequal because of the age-income cycle that affects the entire population: incomes tend to be lower during early working years and peak in later years, before declining again (Paglin, 1975). Taking both of these factors into account, Björklund (1993) finds that the dispersion of lifetime income in Sweden is about 35-40 percent lower than that of annual income. The concept of lifetime income inequality is also important for assessing the redistributive effects of social insurance contributions and benefits.

D. Inequality of Opportunity

18. Income inequality can persist across generations, reflecting differences in economic opportunity. Restricted opportunities for increasing incomes can reflect a range of factors, including lack of access to education (including early childhood and tertiary education) and lack of access to certain professions or business opportunities (OECD, 2011a; Corak, 2013). This lack of access is in turn reinforced by low incomes. Therefore, high income inequality is both a symptom and a cause of low economic mobility, and family background is a key factor in determining the adult outcomes of younger generations.

19. Intergenerational income mobility is lower in countries with higher income inequality. Intergenerational earnings mobility, as measured by the elasticity between a parent"s and an offspring"s earnings, is low in countries such as Italy, the United Kingdom and the United States, which have high Gini coefficients for disposable income. In contrast, mobility is much higher in the more egalitarian Nordic countries (Figure 5). This relationship between income inequality and intergenerational mobility is often referred to as the "Great Gatsby Curve" (Krueger, 2012). In low-mobility countries, about 50 percent of any economic advantage that a father has is passed onto his offspring, whereas in high-mobility countries this falls to less than 20 percent. Evidence for Nordic countries finds that intergenerational income mobility is flat across much of the parental income distribution but rises at the top end. In developing economies with available data, income mobility is extremely low, especially in the high inequality economies of Latin America.

Note: The intergenerational earnings elasticity estimates in the chart are the elasticity between a father"s income and a son"s income. The upward slope of the line suggests that countries with a high inequality of income around 1985 (high Gini coefficients) had high intergenerational earnings elasticities. A high elasticity suggests a strong relationship between a father and son"s income and less mobility of incomes across generations.

Fiscal Redistribution

20. Evaluating the redistributive impact of fiscal policies requires a comparison of incomes after taxes and transfers with those that would exist without them. In principle, assessments of the incidence of fiscal policies should incorporate information on consumers" and producers" behavioral responses to taxes and transfers and their impact on market incomes. In practice, most studies do not incorporate this aspect, since sufficient data on behavioral responses are often unavailable. In these studies, the incidence of commodity taxes is typically assumed to fall on consumers, factor taxes are assumed to fall on factor suppliers (labor and capital), and transfers to beneficiaries do not lead to changes in factor supplies. The evidence below is drawn from such studies. In econometric studies, on the other hand, behavioral responses are captured…

A. Advanced Economies

21. Fiscal policy has played a significant role in reducing income inequality in advanced economies, with most of this reduction being achieved on the expenditure side through transfers. Over recent decades, direct income taxes and transfers have decreased inequality in advanced economies by an average of one-third (Figure 6). For instance, in 2005, the average Gini for disposable income was 14 percentage points below that of the average market income Gini. The redistributive impact of transfers accounts for about two-thirds of the decrease in the Gini. Within transfers, non-means-tested transfers (including public pensions and family benefits) account for the bulk of the redistribution (Immervoll and others, 2005; Paulus and others, 2009). On the tax side, personal income taxes make an important contribution to reducing inequality in a number of economies -in fact, in most economies, the redistribution achieved through income taxes is even higher than for means-tested transfers.

Note: The impact on inequality of disposable income does not incorporate the redistributive impact of indirect taxes and in-kind benefits.

22. Social insurance and other transfers are far less redistributive when examined from the perspective of lifetime income. Pension systems, for example, redistribute income across an individual"s own lifetime, with pension contributions being made during peak earning years, and benefits received during retirement when incomes are lower. Similarly, households receive more in transfers when they have children. The fiscal redistribution of incomes from the lifetime rich to the lifetime poor is thus smaller than that implied by a snapshot in any one year. For instance, Bovenberg, Hansen, and Sorenson (2012) show that about three-fourths of redistribution in Denmark involves redistribution over peoples" lifecycle as opposed to redistribution from lifetime rich to lifetime poor -they also report similar magnitudes for Australia, Ireland, Italy, and Sweden from other studies.

23. Reductions in the generosity of benefits and less progressive taxation have decreased the redistributive impact of fiscal policy since the mid-1990s. Between the mid-1980s and mid- 1990s, the Gini coefficient for market income increased by 3.1 percentage points, while that for disposable income increased by only 1.1 points (Figure 7). Therefore, fiscal policy offset about two-thirds of the increase in market income inequality over this period. Over the subsequent decade (mid-1990s to mid-2000s), market income inequality increased by a further 2.2 percentage points while disposable income inequality increased by 1.8 percentage points. Therefore, while market income inequality increased by less than over the previous decade, disposable income inequality actually increased by more. As a result, during the two decades from the mid-1980s to the mid-2000s, fiscal policy offset less than half of the increase. In the absence of policy changes, the absolute distributive impact of fiscal policy would have been higher (and the increase in disposable income inequality lower) than observed over the second decade. This is the case because a progressive tax and benefit systems tends to redistribute income even more when market inequality rises (e.g., due to unemployment or rising incomes of top earners). The decrease in the redistributive power of fiscal policy has been attributed to fiscal reforms in many economies since the mid-1990s that have reduced the generosity of unemployment and social assistance benefits as well as income tax rates, especially at higher income levels (OECD, 2011a).

24. The evidence on the effects of reductions in corporate income taxes on inequality is mixed. In theory, the impact of corporate taxes on wages and capital income over the long run depends on the relative mobility of capital and labor across both sectors and countries (Auerbach, 2006). Where capital is more internationally mobile, the incidence of corporate taxes will tend to fall on wages to the extent that labor is immobile, with this impact being reduced when the home country is large enough to affect the international rate of return on capital. However, the taxation of "rents" (i.e., above normal profits) is still likely to fall on owners of capital. Recent empirical evidence on the long-run incidence of corporate taxes suggests that between 45 and 75 percent of the corporate tax burden falls on wages (Gentry, 2007; Arulampalam, Devereux, and Maffini, 2010). Since wage earners typically have lower mean incomes than those with capital income, corporate income taxes may not be as progressive over the longer term as is often believed.

25. The overall redistributive impact of fiscal policy is also influenced by the distribution of indirect taxes and in-kind transfers. Empirical evidence suggests that indirect taxes tend to be regressive or proportional to incomes (O"Donoaghue, Baldini, and Mantovani, 2004; Cnossen, 2005). While both the value-added tax (VAT) and excise duties are found to be regressive, excise taxes are especially regressive. However, the regressivity of indirect taxes is typically much smaller when assessed against lifetime income or consumption. In-kind transfers such as education and health spending are very progressively distributed (i.e., their benefits are more equally distributed than disposable incomes). On average, in-kind transfers are found to decrease the Gini coefficient by 5.8 percentage points in five European economies (Belgium, Germany, Greece, Italy, and the United Kingdom), with health (3.6 points) and education (2.2 points) accounting for virtually all of this impact (Paulus, Sutherland, and Tsakloglou, 2009). In addition, expansion of access at lower levels can decrease earnings inequality in the medium term (De Gregorio and Lee, 2002)…

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Design of efficient redistributive fiscal policy

A. Conceptual Framework

30. This section discusses how fiscal policy can contribute to achieving distributional objectives at minimum efficiency cost. As highlighted earlier, while there is broad consensus regarding recent trends in income inequality, there is less consensus regarding the forces driving these trends -for example, whether its reflects inefficient rent seeking or efficient market rewards for increasing productivity- or on the policy implications for countries. However, there is clear evidence of rising popular support for redistribution from public attitude surveys in advanced and developing economies.

31. Redistributive fiscal policy should be consistent with an appropriate level and composition of public spending and fiscal sustainability. In theory, the optimal level of spending is where the marginal social benefit of spending equals the marginal social cost of financing this spending. Since this applies to each category of spending, for a given source of financing, the marginal social benefit of spending should also be equal across spending categories. These considerations have three implications. First, the optimal level of redistributive spending will vary from country to country, as it depends on preference and costs (including the efficiency costs of taxation). Second, the benefits from additional spending on redistribution should be compared with the benefits of raising outlays in other areas, such as public infrastructure to support higher growth. Third, redistributive fiscal policy should be consistent with fiscal sustainability, which can support economic growth and the capacity to finance higher spending on redistribution over the longer term.

32. Fiscal redistribution can usually most efficiently be achieved through direct instruments that tax or provide benefits based on income. Fiscal redistribution, by its very nature, involves transferring resources from higher-income to lower-income households through taxes and transfers. On the tax side, personal income taxes, for example, are often preferable for achieving redistribution than taxes on consumption because they directly take account of the ability of households or individuals to pay. On the spending side, cash transfers to poor households are usually superior to indirect methods such as price subsidies. Better targeting of transfers reduces their fiscal cost and the tax levels required to finance them, thus achieving distributional objectives in a more efficient manner. Targeting, however, is not without efficiency costs and must be designed carefully.

33. The impact of tax and expenditure policies on redistribution should be evaluated jointly. Although both taxes and spending can have redistributive implications, the trade-off between efficiency and redistribution will usually differ. Therefore, where the efficiency cost of redistribution through taxes is relatively large, this suggests that these taxes should focus on raising revenue to finance other redistributive instruments. For instance, an increase in regressive taxes can still be the best approach to supporting redistribution if the public expenditures they finance are highly progressive.

34. Both tax and expenditure policies need to be carefully designed to balance distributional and efficiency objectives. These can be designed to minimize efficiency costs (in terms of effects on incentives to work and save) through applying the following principles:

? Use means-tested cash transfers where possible while minimizing adverse labor market incentives. Means-tested programs restrict eligibility or benefit levels according to income and can thus achieve redistributive objectives at a lower cost than benefits provided to the entire population. These programs should be implemented in a manner that avoids adverse effects on labor markets, for example, by gradually phasing out benefits as incomes rise.16 In countries with a strong preference for providing benefits on a universal basis and the capacity to raise high levels of revenues in an efficient manner with broad popular support, means-testing may not be the socially optimal approach.

? Use tagging where means testing is not feasible. Tagging links transfers to characteristics that are strongly correlated with income. The more strongly correlated are the characteristics with income or other characteristics of need, the lower the fiscal cost of achieving a given amount of redistribution. However, since characteristics used as "tags" are only imperfectly correlated with need, this results in undercoverage of the poor and leakage of benefits to the non-poor. Therefore, additional transfer programs may be needed to protect the excluded poor. In addition, to be effective, tags should not easily be manipulated by individuals or households and should be easily verifiable.

? Make income taxation progressive. The efficiency costs of redistribution can be reduced with tax schedules that entail higher tax rates for upper-income groups than for those in the middle of the income distribution…

? Design indirect taxes to raise revenue in an efficient manner. Efficiency and costs of administration and compliance typically point to making broad-based consumption taxes uniform and avoiding differential rates across goods and services. These revenues can then help finance progressive spending. So ineffective are reduced rates in targeting support to the poor that the impact of eliminating them -and expanding even moderately progressive spending- can be pro-poor (Keen, 2014). The case for reduced rates is strongest where the capacity to deliver public transfers to the poor is very weak.

35. Fiscal policy can also promote equality of opportunity and greater intergenerational mobility. Spending focused on increasing access to education and health can enhance social mobility and help break the inter-generational transmission of poverty and disadvantage. Expanding access for disadvantaged groups will also enhance the progressivity of public spending. In addition, improved education and health outcomes among lower income groups will lower future income inequality thus reducing the need for redistributive taxes and transfers.

36. The appropriate mix of direct and indirect instruments will depend on administrative capacity. The effective use of direct cash transfers and taxes requires that the government has access to information on individual incomes and the administrative capacity to process this information, collect taxes, and pay transfer benefits to households. When such capacity is limited, as is the case in many developing economies, indirect instruments (such as tagging and progressive indirect taxes) need to be considered as an alternative way to achieve redistribution. In general, the range of options that are feasible for emerging economies, especially on the expenditure side, will be wider than that for low-income economies.

37. The economic costs of using fiscal policy to achieve distributive goals should be compared with other policy instruments, such as labor market regulations. Minimum wages and employment protection regulations, for example, impose economic costs on the private sector. The impact of minimum wages on inequality is ambiguous, given its offsetting effects on wage dispersion and employment. Even when effective at increasing wages for low-wage workers, they are a blunt instrument for addressing inequality, since these benefits will also accrue to non-poor households with members working at low wages. Given the uncertainty around the possible effects of wage and employment regulations, fiscal instruments (such as well-designed in-work social benefits) are in most cases a superior approach to achieving redistributive goals in an efficient manner…

38. The effect of redistributive fiscal policies should be considered in conjunction with these labor-market regulations. For example, in-work benefits can increase labor supply and reduce low-skilled wages, thus shifting some of the benefit incidence to employers. This, however, can only occur when minimum wages are relatively low and do not impose a binding floor…

B. Social Spending

39. This section considers how social expenditure policies in advanced and developing economies can be reformed to achieve more efficient redistribution. As seen in earlier sections, social spending (social protection, education, and health) is the primary instrument used to achieve redistributive goals in most countries. This spending can be made more efficient by improving its targeting and reducing its adverse labor market effects. The appropriate mix of programs and design features will vary across advanced and developing economies to reflect differences in fiscal and administrative capacities. The discussion focuses first on social protection spending, including public pensions, family benefits, social assistance, and unemployment benefits. This is followed by a discussion of the main in-kind social spending items, education and health.

40. In advanced economies, appropriately designed pension reforms can perform an effective redistributive role while ensuring fiscal sustainability. Pension benefits account for about two-thirds of social protection spending and, in the absence of reforms, average pension spending is projected to rise by an additional 1½ percent of GDP by 2030 (Clements and others, 2012). Pension systems play an important lifetime consumption smoothing role in protecting the elderly from a sharp drop in consumption during retirement and account for over half of the total redistributive impact of social transfers. At the same time, many economies will need to contain increases in pension spending in the coming decades to support fiscal consolidation. The following reform options could safeguard the redistributive role of pensions while containing the growth of spending:

? Increasing the effective retirement age. Gradual increases in the statutory retirement age reduce the need for other reforms that lower pension benefits and risk increasing old-age poverty (Shang, 2014), and can also enhance employment and economic growth. Because lower-income groups tend to have shorter life expectancy than higher income groups, an increase in the retirement age results in a proportionally larger reduction in their lifetime pension benefits. This can be mitigated by linking pension eligibility to years of contribution instead of a single statutory retirement age. Increases in the retirement age should also be accompanied by measures aimed at enhancing the earning opportunities for those approaching the statutory retirement age, especially the low skilled whose income potential can decline significantly as they approach retirement. In some economies, this may require strengthening of labor regulations protecting older workers, as well as retraining and adult education programs. Older workers should be protected fully by disability pensions where appropriate, and through social assistance programs to ensure that increases in retirement ages do not raise poverty rates. In addition, incentives and opportunities for early retirement (including through disability benefits) and disincentives to work beyond the statutory retirement age need to be reduced in many countries, for example, through concessional contribution rates and in-work benefits.

? Incorporating pension incomes into a progressive income tax system. In many countries, pensions enjoy favorable tax treatment. In such cases, equalizing treatment across income sources by incorporating all pension benefits into the standard progressive income tax system can reduce the net fiscal cost of pension spending while protecting lower-income groups and lowering inequality. In addition, countries that subsidize private pensions through tax relief or matching contributions should consider scaling these subsidies back since these benefits accrue mostly to high income groups and have little impact on national savings (European Commission, 2008).

? Making benefit cuts progressive. Many parametric reforms contain spending pressures by reducing replacement rates (i.e., the ratio of the average pension benefit to the average wage) over time. Where possible, these reductions should be progressive to avoid increases in poverty among the elderly. However, progressive benefit cuts require larger cuts in replacement rates for higher income groups, and thus involve a trade-off between poverty and consumption smoothing objectives and may exacerbate compliance problems. Where benefit cuts for lower income groups are unavoidable, it is important that these groups have access to other social benefits to prevent them from falling into poverty. Addressing old-age poverty concerns through a means-tested social pension financed from general revenues would also allow the earnings-related component to achieve its broader consumption smoothing objectives more efficiently, and the financing could use revenue instruments that are more progressive than payroll taxes…

42. In advanced economies, family benefits can be made more efficient by greater use of means testing and strengthening incentives to return to work. On average, in 2005, family benefits decreased the disposable income Gini by nearly 1.5 percentage points, accounting for nearly three-quarters of the redistributive impact from total social assistance spending. These benefits include a range of transfers such as paid maternal/paternal leave, child allowances, and childcare benefits. Parental leave schemes, e.g., with a guarantee to young mothers to return to their previous job within a certain time period, can help keep young mothers connected to the labor market. Child benefits facilitate consumption smoothing over the life-cycle by transferring resources to families with children since children increase family needs and can also reduce second-earner incomes. These objectives can be more efficiently achieved by:

? Means testing and conditioning of child benefits. High child allowances reduce incentives for women to enter the labor market with detrimental effects for future earnings prospects. Linking benefits to labor force participation (including through childcare subsidies and child tax credits) can strengthen incentives to enter the labor market and decrease welfare dependency (Gong and others, 2010; Kalb, 2009; Elborgh-Woytek and others, 2013). Expanding the role of means testing and including benefits in taxable income within a progressive tax schedule, can make child benefits more progressive and could generate substantial savings given the very small share of these benefits that is currently means tested (Figure 11). Means testing also protects the consumption smoothing role of these benefits since higher income groups have greater consumption smoothing opportunities.

? Reducing the maximum duration of paid parental leave benefits. Reducing the maximum duration in countries where it is very long can increase incentives to return to employment -Jaumotte (2003) found that parental leave has a positive effect on female labor supply up to a limit (20 weeks with full replacement of earnings), above which the marginal effect of further leave becomes negative. Appropriately designed parental leave benefits can also reduce poverty and welfare dependency, since long spells out of the workplace can have detrimental effects on future earnings potential. Capping leave benefits where they are earnings related can also increase benefit progressivity. Although family benefits are much less common in emerging and low-income economies, they can be incorporated into targeted cash transfer programs through linking benefit levels to household composition as in conditional cash transfer programs (discussed below).

43. Advanced economies could intensify the use of active labor market programs (ALMPs) and in-work benefits to address the work disincentives inherent in means-tested transfers. Guaranteed minimum income programs in many advanced economies aim to fill the gap between "needs" and "means". Although these programs may have only a small impact on inequality, reflecting low aggregate spending, they play a key role in addressing poverty. However, the withdrawal of benefits as individuals return to employment creates strong work disincentives, especially for low-wage workers and families with children. These disincentives can be reduced through:

? Strict conditioning of eligibility on participation in ALMPs. In most advanced economies, continued eligibility for benefits is conditioned on participation in ALMPs, including personal employment services, training, job placement, and public employment schemes. Tight activation measures are especially important for containing spending and providing incentives to work. The intensity of activation requirements should increase with unemployment duration to allow an initial period for job search, followed by assistance with job placement and access to training opportunities. Although the strictness of this conditioning has increased over the last decade, there is still significant room for improvements in many countries (OECD, 2012).

? Greater use of in-work benefits. Many economies have adopted a system of in-work benefits that allow for the gradual withdrawal of benefits as earnings or employment duration increase (IMF, 2012a). This reduces the net tax on additional earnings, which can even be negative for low income groups… When combined with effective ALMPs, they can have significant beneficial impacts on employment, inequality, and poverty. Containing the fiscal cost of in-work benefits requires a more rapid withdrawal of these benefits as incomes increase, which may create work disincentives further up the income distribution…

47. Unemployment benefits can be designed to strengthen incentives to take-up employment. Unemployment benefits play a key role in advanced economies in protecting individuals from loss of income due to transitory or structural unemployment. However, these programs, if not well designed, can adversely affect employment incentives and outcomes (Meyer, 2002; Abbring, van den Berg, and van Ours, 2005; OECD, 2006). By increasing work incentives, efficient benefit design can reduce spending while also decreasing income inequality, since benefits are typically below wages. This can be achieved through a number of design features, including:

? Strict eligibility criteria. Tightening eligibility rules (e.g., based on past employment and contributions or mandatory participation in ALMPs) reduces fiscal cost by incentivizing the return to employment or channeling more of the unemployed to social assistance with lower benefits.

? Short duration. Lowering the maximum duration of benefit eligibility can expedite the return to employment or the transition to social assistance. About a third of OECD countries have a maximum duration in excess of 12 months.

? Declining benefit levels. Reducing replacement rates with unemployment duration provides strong incentives to return to employment. The desired generosity of benefits can be achieved through various combinations of benefit level and duration.

? Individual unemployment savings accounts (ISAs). Increased use of these accounts could help to reduce the distortionary impact of contributions by strengthening the link with benefits received and could also facilitate the expansion of unemployment insurance schemes in developing economies with large informal sectors. For example, under this system, part of the unemployment insurance contribution could be credited to an individual account on which a person receives interest (Bovenberg and others, 2012). During a period of unemployment, individuals can draw money from their account. Once the account is exhausted, individuals can borrow from the government at the same interest rate. Individual accounts are used in a number of emerging economies, including Brazil and Chile (Hijzen and Venn, 2011).

48. Education reforms in both advanced and developing economies could focus on improving access by low-income groups. The regressive benefit incidence of education spending in developing economies reflects lower access by low-income groups to higher levels of education (including upper secondary and tertiary education). In advanced economies, although education spending as a whole is progressive, tertiary education spending tends to be regressive. This lack of access to education in both developing and advanced economies also results in inequality of opportunity and perpetuates inequality across generations. A range of spending reforms focused on improving access can help to enhance the distributional impact of education spending, including:

? Increasing investment in lower levels of education. The main driver behind the regressivity (or lower progressivity) of public education spending is the large share of the budget allocated to higher levels of education, which are disproportionally accessed by higher income groups. Lack of access for lower income groups to higher levels is primarily due to lack of progress through lower education levels. In developing economies, this requires improving access to and progression through primary and lower-secondary education, especially for girls and in rural areas. In advanced economies, this requires improving access to, progression through, and performance in higher-secondary and tertiary education. Increasing access to early childhood education is required in both advanced and developing economies, especially given the substantial evidence that this has a crucial impact on education performance at higher levels.

? Improvements in the efficiency of education spending. Increased spending on education at lower levels should be complemented by efforts to get better results from existing levels of spending. Inefficiencies in spending are substantial, including in low-income economies (Gupta and others, 2007; Grigoli, forthcoming).

? Increased cost recovery in tertiary education. Demand for tertiary education has increased rapidly in both advanced and developing economies, and often faster than public financing capabilities. This has resulted in a decline in the quality of instruction in public institutions and a growth in private education institutions (Woodhall, 2007; OECD, 2011b). Since much of the benefit from tertiary education accrues to graduates in the form of higher earnings and other non-monetary benefits, there is a strong case for financing more of this cost from tuition fees. Income-contingent student loans to cover tuition and subsistence costs allow students to begin paying off their loans once they start earning, ensure that higher education is free at the point of use, and provides insurance against the inability to repay due to low future income (Barr, 2012). Increasing private financing also allows tertiary education to expand without increasing public spending.

? Targeted conditional cash assistance. As discussed above, targeting cash assistance to those with disadvantaged access to education, and conditioning this assistance on certain education outcomes, can help to reduce income barriers to education and incentivize improved education achievement. This "conditional cash transfer" strategy is being increasingly used in both advanced and developing economies. Additional complementary reforms may also be necessary, such as targeted information campaigns and increasing availability of shorter term qualification options…

50. In advanced economies, maintaining the access of the poor to health care services during periods of expenditure constraint is consistent with efficient redistribution. Public health care spending is a large share of total public spending and is projected to rise by almost 3 percentage points of GDP between 2013 and 2030 (Clements, Coady, and Gupta, 2012; IMF, 2013b). Health care reforms to curb the growth of spending will be a necessary component of many countries" fiscal adjustment plans. Some of these reforms could take the form of an increase in cost-sharing with the private sector, for example through increased co-payments, or a reduction in the scope of services provided by the public sector. These reforms could be designed to ensure that the poor maintain access to services, for example, by exempting them from co-payments.

C. Tax Design

51. While the primary contribution of taxation to the pursuit of equity goals is through financing spending measures, they can also in themselves efficiently contribute to achieving redistributive goals. Previous sections have shown that the mix of direct and indirect tax instruments, as well as the details of their design and other tax policies, have important distributional implications. Tax structures were seen to vary significantly across advanced and developing economies, reflecting different stages of development and administrative capacities. The redistributive role of taxation depends on the progressivity of income-related taxes (including not just personal income tax (PIT) but also, in particular, means-tested transfers), the taxation of capital income and wealth that are concentrated among the better off, and the design of indirect taxes. This section explores how such tax policies could be designed, looking in turn at income taxes (on wages, capital income, and business income), wealth taxes (including those on property, transactions, and inheritances) and consumption taxes.

52. Many advanced and developing economies can achieve their redistributive objectives more efficiently through increasing the progressivity of their tax and transfer systems. These include the PIT, social contributions, as well as negative income taxes and targeted transfer schemes, which were discussed in the previous section. In developing economies, the main challenge is to develop a better-functioning PIT system that helps increase tax ratios. In advanced economies, more progression can be achieved through reform of PIT rate schedules, reducing exemptions, and by setting sufficiently high thresholds.

? Implementing progressive PIT rate structures can contribute to reducing inequality. The median top PIT rate (based on a large group of economies across the globe) dropped from 59 percent in 1980 to 30 percent today (Figure 12). Since the mid-1990s, 27 countries -especially in Central and Eastern Europe and Central Asia- have introduced flat tax systems, usually with a low marginal rate. These regimes are typically less redistributive than those with stepwise increasing PIT rates, especially for top incomes. In these and other economies with relatively low top PIT rates -or in economies where the top PIT bracket starts at a relatively high level of income 40- there may be scope for more tax progression at the top. Note, however, that behavioral distortions impose an upper limit as to how far these top PIT rates can be increased. For instance, IMF (2013b) finds that revenue-maximizing PIT rates are probably somewhere between 50 and 60 percent -and optimal rates probably somewhat lower than that, depending on the welfare weights assigned to the rich…

? Raising progressivity also requires reconsideration of tax deductions. Many economies -including developing ones- adopt various tax allowances in their PIT related to children, education, housing, health insurance, commuting and charitable donations. Some accrue disproportionately to the rich, such as deductions for mortgage interest. This is because households with high incomes are more often homeowners, and tax relief is often granted in the form of deductions, which are worth more at higher marginal tax rates. Rationalizing mortgage interest deductibility could complement steps towards a more progressive tax system and also improve efficiency, since these deductions create their own distortions (IMF, 2009). More generally, tax expenditures of this kind often come along with significant revenue losses. In many countries, these might not be subject to the same public scrutiny as ordinary public spending, especially when the governments does not publish a tax expenditure review. Tax expenditures should undergo to the same cost-benefit analysis as spending measures. Some, but not all, tax deductions might well be justified on the basis of their implications for equity and efficiency, such as deductions for charitable giving…

? Reforming the PIT threshold can, in some cases, enhance tax progression. A threshold -either in the form of a zero-tax bracket, a basic deduction or a general tax credit- supports tax progression by reducing or eliminating the tax burden on people with the lowest incomes. Thresholds vary significantly across economies. In the OECD, the median is approximately 25 percent of the average wage. Several emerging and developing economies, however, have no threshold at all (USAID, 2013) and introducing one could relieve the poorest households from the obligation (often more in principle than practice) to pay tax and ease administration. However, the threshold should not be too high, as this can lead to greatly reduced revenues. In 16 developing economies, for instance, the threshold exceeds two times GDP per capita. This contributes to the small coverage of the PIT and a low revenue yield, thus undermining redistributive income taxation. Note also that tax credits are in principle more progressive than tax deductions, since the value of a credit does not depend on the marginal tax rate faced by the taxpayer, as is the case with a deduction.

53. Taxes on capital income can strengthen the progressivity of the tax system, but high rates can have substantial efficiency costs. Taxpayers who save and invest are generally among the better off, so even a proportional tax on capital income can increase progressivity. Moreover, taxing capital income is necessary to mitigate arbitrage in the taxation of entrepreneurial income, as it is often difficult (or even impossible) to distinguish labor from capital income earned by the owner-directors of a firm. The latter makes it important to broadly harmonize the rates of the PIT and the combined burden of Corporate Income Tax (CIT) and dividend/capital gains taxation. However, capital income taxes, if too high, can have high efficiency costs because of their distortionary effects on savings and investment. Moreover, it can be administratively difficult to tax capital in light of its mobility, with the latter leading to ample evasion and avoidance opportunities. In addition the mobility of capital allows firms to shift a large share of the burden of these taxes onto labor, as discussed earlier. To strike the right balance between equity and efficiency, governments could consider the following options:

? Tax different types of capital income in a neutral way. Capital income is generally taxed at both corporate and personal levels. However, interest is usually deductible for the CIT (whereas the return to equity is not). In addition, some investors or investments are PIT-exempt, and different types of capital income often face different PIT rates. As a result, interest is often lightly taxed and dividends highly taxed, especially when compared with the taxation applied to capital gains. This gives rise to arbitrage and leads to behavioral changes that erode the capital tax base and create economic distortions, as well as leading to horizontal inequity -referring to the unequal taxation of individuals with similar incomes and assets.

? Consider a lower effective rate on capital income than labor income. Several economies impose a lower overall tax rate on capital compared to labor income. For example, this is found in dual income tax systems where capital income is separated from labor income and taxed at a uniform and relatively low rate (Cnossen, 2000; Sorensen, 2005). Some economies also give targeted relief for the normal return on capital through an allowance at either the corporate level (such as Belgium and Italy) or the personal level (such as Norway).

? Adopt withholding taxes, especially if administration is weak. Taxing capital income at the individual level can be administratively challenging. This provides a rationale for taxing these incomes through withholding at the level of the firm, i.e., the CIT. In countries with weak administrations, withholding taxes on interest and dividends can, to some extent, further circumvent administrative difficulties. Some Latin American countries also impose withholding taxes on capital gains at source.

? Develop more effective taxation of multinational business income. Multinationals use a variety of tax-planning strategies to reduce their global tax liabilities, leading to profit shifting and base erosion. This poses challenges to both advanced and developing economies, and is particularly acute in the latter in light of their greater reliance on CIT receipts. In light of this global challenge, the OECD has begun a two-year action plan on "Base Erosion and Profit Shifting" (BEPS) to address some of these challenges (OECD, 2013). The IMF has work underway, aimed to identify appropriate policy responses, including unilateral and multilateral initiatives (IMF, 2013c).

? Automatically exchange information internationally. This has been announced by the G20 as the new global standard and can enable economies to more effectively impose residence-based capital income taxes by mitigating international tax evasion and avoidance (Keen and Ligthart, 2005). There has been some progress in this regard, led by the OECD"s Global Forum on Transparency and Information Exchange. Unilateral measures are also proceeding, notably the U.S. Foreign Account Tax Compliance Act (FATCA), which envisages penalties for noncompliance. For developing economies, however, this imposes a formidable administrative challenge that might have to compete with more urgent priorities.

54. Some taxes levied on wealth, especially on immovable property, are also an option for economies seeking more progressive taxation. Wealth taxes, of various kinds, target the same underlying base as capital income taxes, namely assets. They could thus be considered as a potential source of progressive taxation, especially where taxes on capital incomes (including on real estate) are low or largely evaded. There are different types of wealth taxes, such as recurrent taxes on property or net wealth, transaction taxes, and inheritance and gift taxes. Over the past decades, revenue from these taxes has not kept up with the surge in wealth as a share of GDP (see earlier section) and, as a result, the effective tax rate has dropped from an average of around 0.9 percent in 1970 to approximately 0.5 percent today. The prospect of raising additional revenue from the various types of wealth taxation was recently discussed in IMF (2013b) and their role in reducing inequality can be summarized as follows.

? Property taxes are equitable and efficient, but underutilized in many economies. The average yield of property taxes in 65 economies (for which data are available) in the 2000s was around 1 percent of GDP, but in developing economies it averages only half of that (Bahl and Martinez Vazquez, 2008). There is considerable scope to exploit this tax more fully, both as a revenue source and as a redistributive instrument, although effective implementation will require a sizable investment in administrative infrastructure, particularly in developing economies (Norregaard, 2013).

? Recurrent taxes on net wealth generally raise little revenue. Financial wealth is mobile and taxes hard to enforce because they are easily evaded. Few advanced economies today have recurrent taxes on broad measures of net wealth and, where they exist, revenue is typically low. More effective exchange of information across economies could help mitigate evasion and improve the prospect for net wealth taxes to increase revenue yields. If so, they can have some appeal as an instrument to reduce wealth inequality and support equality of opportunity.

? Taxes on inheritances and gifts could play a useful role in limiting inter-generational inequality, which as noted earlier is high in many economies, and strengthening equality of opportunity (Boadway, Chamberlain, and Emmerson, 2010). However, where they exist, rates are generally low, exemptions and special arrangements widespread, and revenue yields small. In the OECD, revenue has been declining over time from 0.35 percent of GDP in 1970 to less than 0.15 percent today. There may be more potential, which is illustrated by, for example, France and Belgium where revenue yields are, respectively, 0.4 and 0.65 percent of GDP.

? Transaction taxes on property and financial assets are administratively appealing, since transactions can often be easily observed and administered. However, these taxes are economically distortive, as they impede otherwise mutually beneficial trades. Transaction taxes on real estate can thus reduce labor mobility and raise unemployment. Financial transaction taxes (FTT) have been much discussed recently, including in the EU where 11 member states have plans to introduce a broad-based FTT. Yet, FTTs can have significant social costs due to cascading effects (tax levied on tax), increasing costs of capital, encouraging avoidance schemes, and potentially impeding socially worthwhile transactions. Moreover, their distributional impact is unclear as the incidence may be shifted onto consumers (Matheson, 2012).

55. Consumption taxes are generally inferior for achieving redistributive objectives compared to income-related taxes and transfers. As shown earlier in the paper, the VAT is generally regressive in advanced economies -at least when assessed against current income rather than current consumption- while it is often found to be progressive in developing economies (Bird and Gendron, 2007). Also excises tend to bear relatively more heavily on people with low incomes in advanced economies (Cnossen, 2005), while this is not generally so in developing economies. Regarding the design of indirect taxes, the following recommendations apply.

? Minimize the use of exemptions or reduced VAT rates. Exemptions or reduced rates on necessities, such as food or energy, are often used to mitigate the regressive impact of the VAT in advanced countries, as expenditure shares of these goods are generally higher for the poor. However, such policies are blunt redistributive instruments, because the rich generally spend more in absolute terms on these goods and thus enjoy significant benefits. Advanced economies usually have access to better instruments to help the poor and vulnerable, such as targeted transfers and progressive PIT systems. For instance, elimination of reduced VAT rates in the United Kingdom, and using the proceeds to increase social benefits, is found to significantly reduce inequality while also boosting revenue (Crawford and others, 2010). In developing countries, exemptions and special VAT rates should also be minimized, as they erode the revenue base and reduce the opportunity to finance redistributive spending. Indeed, even poorly targeted public spending is generally better for the poor than reduced VAT rates (Keen 2014). For instance, in Ethiopia, the net impact of a uniform VAT with the proceeds used for general spending on education and health is found to have a strong progressive impact (Munoz and Cho, 2004). However, where capacity constraints prevent spending programs from reaching the poor, the case for some differentiation in VAT rates, e.g., for basic food items, can be strong.

? Set a sufficiently high VAT registration threshold. Small traders bear a significant compliance burden of the VAT, which they would likely partly pass on to consumers in the form of higher prices (Ebrill and others, 2001). A threshold aims to reduce the compliance cost of VAT for small traders while, at the same time, the revenue foregone is typically not much higher (or even lower) than the cost of collection. A threshold can also strengthen the progressivity of the VAT by reducing the tax on small traders in rural areas where VAT compliance is particularly problematic. In the Dominican Republic, for instance, a VAT threshold has been found to have a strong pro-poor effect (Jenkins, Jenkins, and Kuo, 2006).

? Use specific excises mainly for purposes other than redistribution. Specific excises on cigarettes, alcoholic beverages, gambling, and motor fuels should rather be viewed as corrective tools designed to alter individual behavior in a way that is socially desirable. For example, greater taxation of energy (including through carbon taxation) can help address carbon emissions and various local pollution externalities and generate a significant amount of revenue. While low income groups would nevertheless suffer a decline in real incomes with rising energy prices, mitigating measures targeted to lower-income groups could be introduced to offset any undesired effects on income distribution (Metcalf, 2007; Clements and others, 2013). Special excises on luxury goods, such as yachts, jewelry or perfumes usefully contribute little to achieving equity objectives, raise little revenue, and add to administrative costs, perhaps with the exception of taxes on motor vehicles.

56. Tariffs have unclear implications for inequality. Trade tariffs are responsible for a significant public revenue share in developing economies. In sub-Saharan Africa, for instance, this is about one quarter. Tariff revenue is, however, declining in light of trade liberalization. The distributional impact of tariffs is not quite clear. How the lowering of tariffs will impact inequality will also depend on whether and how countries will be able to recover the lost revenue through other domestic revenue sources (IMF, 2011).

D. Summary

57. Table 1 provides an overview of fiscal policy measures that can help achieve more efficient redistribution in advanced and developing economies.

Fiscal consolidation and inequality

58. The large fiscal consolidations underway in a number of economies have raised concerns about their potential impact on inequality. This is reflected in the increased public support for redistribution since 2008, in particular in countries where the crisis hit the hardest… Equity considerations become even more relevant during periods of consolidation, as they can influence the political sustainability of fiscal adjustment (Cournède and others, 2013; IMF, 2013b).

A. Advanced Economies

59. Fiscal consolidation can affect income inequality through its impact on the distribution of both market and disposable income. Fiscal consolidation typically leads to a short-run reduction in output and employment, which is often associated with a decline in the wage share. This tends to increase market income inequality, given the relatively high share of wages in the incomes of lower-income groups (Jenkins and others, 2011). Increasing unemployment also tends to widen wage inequality, since unskilled wages fall relative to skilled wages as employers hoard skilled labor (Mukoyama and Sahin, 2006). The duration and magnitude of these effects depend on the size of automatic stabilizers, as well as the growth response and its impact on employment. If multipliers are especially high during downturns (Jordà and Taylor, 2013), fiscal contraction can have a strong effect on employment. These effects may be long-lasting if a prolonged period of slow growth has adverse effects on the supply side of the economy (Aghion and others, 2009).

60. The composition and pace of fiscal consolidation influence its impact on inequality. Beyond its effects on market incomes, fiscal consolidation also affects the level and composition of taxes and spending and thus disposable incomes. Income inequality tends to increase the more fiscal adjustment relies on raising regressive taxes and cutbacks in progressive pending. Econometric studies find that fiscal consolidations based on spending cuts worsen inequality by more than revenue-based ones (Ball and others, 2013; Woo and others, 2013; Agnello and Sousa, 2012). Frontloaded adjustments can have especially strong effects on social welfare if they are implemented when unemployment is already high (Blanchard and Leigh, 2013).

61. Evidence from recent fiscal consolidation episodes suggests that a progressive mix of adjustment measures can significantly help offset the adverse effects of adjustment on inequality, though the consolidation may still lead to reduced incomes for the poor in the short term. An analysis of 27 recent adjustment episodes in advanced economies and emerging Europe suggests that, in about half of these economies, market income inequality increased during fiscal consolidations. However, in many cases, the increase was muted by the design of adjustment measures. In almost two-thirds of the economies, fiscal measures led to either a decrease in inequality (a decline in the Gini coefficient for disposable income) or at least partly offset the effect of a worsening of market inequality (Figure 13).

Note: An increase in Gini coefficient indicates an increase in inequality. The Gini coefficient for market income is estimated by Euromod based on post-tax income survey data by Eurostat and simulated figures for taxes, using the Euromod micro-simulation model. *Indicates that data for disposable income refer to 2007–11.

62. A more detailed analysis of fiscal measures suggests that both revenue and spending measures can be designed in ways that reduce their burden on lower-income groups. Among the economies where detailed data are available, simulations of the impact of these measures on disposable income show that five countries (Greece, Latvia, Portugal, Romania, and Spain) implemented progressive measures between 2008 and 2012, with households in the richest quantiles bearing most of the adjustment cost (Figure 14). In other countries, the impact of the adjustment tended to be less redistributive and smaller in size (Italy and the United Kingdom). In contrast, for two economies (Lithuania and Estonia), those in the poorest deciles suffered relatively larger reductions of their income. In Greece, there was also a larger drop in incomes of the poorest ten percent of the population, but the overall effect was progressive, as the second to fourth decile experienced relatively low decreases in their incomes. The simulated effects of the fiscal consolidation measures on the Gini for disposable income are shown in Figure 15. In particular, the difference (represented by the bars in the chart) of the Gini coefficient before and after the implementation of the measures (represented by the triangles and squares, respectively) suggest that fiscal measures have prevented an increase in inequality induced by the market in seven out of nine countries. In particular, the analysis suggests the following:

? Public sector wage reductions were progressive, as public sector employees were mostly skilled and educated workers and a large part of the middle-upper class, and because the cuts were generally structured to have a greater impact on higher income workers;

? Cuts in untargeted benefits were largely progressive, while reductions in means-tested benefits were regressive;

? Proportional reductions in pensions across all beneficiaries proved to be strongly regressive, as pensioners in the lower-middle income groups lost a greater share of their total income. In economies where pension freezes and/or cuts were targeted to high pensions, the overall effect of these measures was progressive;

? Increases in income tax and social contributions proved to be mostly progressive. However, some features of changes in the income tax, such as decreases in the tax-free threshold, reduced the progressivity of income taxation; and

? Increases in VAT rates were regressive, with the relative degree of regressivity depending on the relationship between the VAT structure and consumption patterns of different income groups.

63. This analysis suggests that both expenditure- and revenue-based fiscal adjustments can be designed to mitigate the adverse effects on inequality. While the appropriate pace of fiscal adjustment depends on the state of the economy, the state of public finances, and the extent of market pressures, the progressivity of consolidations depends on the specific design of measures. Governments could consider protecting the most progressive and efficient redistributive spending during fiscal adjustment and improve targeting to minimize the effects of adjustment on inequality. Broadening the scope of spending cuts to reducing subsidies, military spending, and public sector wages can reduce the need for cuts in social transfers. Greater reliance on progressive revenue measures can also avoid the need for large cuts in social transfers, though this room may be limited if taxes are already high (Baldacci, Gupta, and Mulas-Granados, 2012). Progressive tax measures could also be considered, such as reductions in regressive tax expenditures and greater taxation of wealth and property. Finally, expanding active labor markets programs, such as job-search support, targeted wage subsidies, and training programs, can help accelerate the decline in unemployment as economic growth resumes…

Appendix II. Recent Fiscal Consolidations and Income Inequality

The extent and composition of recent fiscal consolidation packages implemented in nine European countries since the global financial crisis differ substantially across economies. The impact of fiscal consolidation on overall disposable income ranged from 1 percent to more than 11 percent, contributing to reductions in living standards of the population. The adopted fiscal measures varied across countries (Appendix Figure 1). Public sector pay reductions were significant in Greece, Latvia, Portugal, Romania, and Spain. Public pension cuts or a freeze in benefits were prevalent in Romania, Portugal, and to a lesser extent, in Spain. Changes in pension indexation were adopted in Estonia. Reductions in means-tested benefits were large in Portugal and the United Kingdom, while reductions in untargeted benefits were sizeable in Lithuania and Latvia. Income tax hikes played a major role in Greece (with an important base-broadening component) and Spain, and increases in worker social insurance contributions played a role in Latvia and Estonia. Increases in VAT rates were adopted in all nine countries…

The overall distributional outcome reflects the composition and design of the consolidation package. Micro-simulation studies indicate that these fiscal adjustments relied on progressive measures. These studies focus exclusively on the impact of spending and tax consolidation measures on household disposable income and consumption, and do not assess the impact of these measures on market income (Callan and others, 2012; Avram and others, 2013; Koutsampelas and Polycarpu, 2013). For a subset of nine countries, studies simulate the impact on disposable income of specific consolidation measures adopted during the period 2008-12 (Appendix Figure 2).

The results suggest that:

? The overall progressivity of the consolidation package in Greece has been driven by progressive public sector pay cuts, pension cuts, and income taxation. Public sector wages were capped, special allowances for civil servants reduced, and the 13th and 14th salaries abolished for high earning workers. The poorest 10 percent of the population were hit relatively harder by the reform of the income tax, which reduced the tax-free threshold from EUR 12,000 to EUR 5,000 in 2011.

? The progressive incidence in Spain was also due to public sector pay cuts and changes in income taxation, although the poorest 10 percent of households were relatively harder hit by the 5 percentage point cumulative VAT increases imposed over 2010 and 2012. The public sector pay cut averaged 5 percent but increased with wage up to 9.7 percent, and was followed by a freeze and the elimination of the 14th month of pay.

? Moderately progressive public sector wage and pension cuts also drove the overall mildly progressive effect of consolidation in Italy, although the scale of the household average income loss was very limited due to a narrow targeting of the implemented measures, which by design only affected a small part of the population. Public sector wages above EUR 90,000 and EUR 150,000 per year were cut by 5 and 10 percent respectively.

? In Portugal, the overall progressive incidence was due to progressive cuts in public wages and pensions, which offset the regressive cuts in means-tested social transfers which negatively affected households in the bottom decile. Public sector pay cuts increased with wage to a maximum of 10 percent, and included the suspension of the 13th and 14th months of pay in 2012. Benefit reductions included a decrease of the amount and tightening of the eligibility conditions for family benefits. The suspension of the 13th and 14th months of pay was reversed in 2013 (after the period under consideration in the analysis).

? The moderately regressive path observed in Lithuania was the result of slightly progressive public sector pay cuts -involving basic wage rates, coefficients, and bonuses- and cuts to untargeted benefits.

? In Romania, the overall incidence was progressive due to public sector pay cuts, real pension reductions for middle-class and rich pensioners, and means-tested benefits.

? Progressive reductions in public sector pay, which decreased the average wage by about 10.5 percent, and non-pension benefits more than offset regressive cuts in public pensions and drove the overall progressivity in Latvia.

? The overall regressive effect observed in Estonia, on the other hand, was driven by a change in the indexation of public pensions, although means-tested social assistance lessened the impact on the incomes of the poorest.

? In the United Kingdom, the overall incidence was progressive, due to higher taxes, especially on the richest 1 percent of the population.

(Información de Hemeroteca)

– El FMI lanza propuestas para reducir la desigualdad económica (The Wall Street Journal – 13/3/14)

(Por Ian Talley)

Washington.- La principal institución económica del mundo está inmersa en una campaña para revertir la creciente brecha entre los ricos y los pobres, advirtiendo que la creciente desigualdad de ingresos está lastrando el crecimiento económico mundial y atizando la inestabilidad política.

El Fondo Monetario Internacional publicó el jueves un documento de 67 páginas en el que explica cómo pueden usar sus 188 miembros la política fiscal y el gasto público para atajar la creciente disparidad entre los que tienen y los que no. El segundo máximo responsable del fondo, David Lipton, explicará más en detalle el caso en un discurso en el que hablará sobre cómo afronta el tema la organización. Se ha tomado esta decisión después de que la directora gerente del FMI, Christine Lagarde, y algunos de los miembros más poderosos del fondo hayan advertido sobre la amenaza que supone la desigualdad para las perspectivas económicas a largo plazo.

El FMI aboga por subir los impuestos y redistribuir la riqueza, entre otras medidas, para reducir la brecha entre ricos y pobres.

La inestabilidad política que se ha extendido en los últimos años por Egipto, Nigeria, Ucrania y Venezuela pone de manifiesto la importancia de las desigualdades económicas. En todos estos países, la disparidad de ingresos y la mala gestión económica han contribuido al incremento de la inestabilidad. Un problema que se ha visto exacerbado en Estados Unidos y Europa por las crisis financieras.

El FMI confía en que se inicien debates públicos sobre las políticas de protección de los pobres y redistribución de la riqueza. Los empleados del fondo han comenzado a poner en duda teorías económicas tradicionales sobre la desigualdad, como la asunción desde hace cuatro décadas de que la redistribución de la riqueza supone un lastre para el crecimiento.

El FMI asegura que la desigualdad en varios países avanzados, como Estados Unidos, ha vuelto a niveles que no se registraban desde antes de la Gran Depresión de la década de 1930.

El último documento del fondo no prescribe medidas específicas para países específicos. Pero ofrece varias propuestas que probablemente serán muy controvertidas. Principalmente, el FMI señala que muchos países avanzados y en vías de desarrollo pueden reducir la desigualdad aplicando impuestos a la propiedad de una forma más agresiva e impuestos "progresivos" sobre la renta personal que sean más elevados cuanto mayor sea la renta.

Si los países en vías de desarrollo amplían el porcentaje de ingresos que gravan, exigiendo más a los ciudadanos con mayores rentas, los estados podrían gastar más en educación y servicios de salud, dos programas que, entre otros, pueden acabar con la pobreza generacional y que aumentan los ingresos, lo que a su vez alimenta las perspectivas de crecimiento económico a más largo plazo.

Sin embargo, los ingresos son sólo la mitad de la ecuación. Incluso cuando hay ingresos para invertirlos en gasto social, a menudo este gasto está mal estructurado, según el FMI. Una de las mayores cargas económicas que sufren muchos países emergentes son los subsidios a los alimentos y los combustibles.

Los gobiernos de Venezuela, Ucrania y Egipto han dependido mucho de los subsidios estatales y los países están cerca de la quiebra, ya que las arcas estatales no pudieron afrontar los crecientes costes, pese a las presiones políticas para mantenerlos.

El FMI agregó que los países en vías de desarrollo deberían unificar y ampliar sus programas de asistencia social, dirigir mejor sus subvenciones hacia los más pobres y vincular las transferencias de dinero estatal a los más vulnerables a servicios de salud y educación.

– Las cuatro claves del FMI para frenar la desaparición de la clase media (El Economista – 13/3/14)