NIPFP Redistributive Implications of Fiscal Policy Income Redistribution or Poverty Alleviation

NIPFP Scheme of Presentation Introduction Concept of equity in fiscal policy Redistributive effects of tax policy Progressivity of expenditures Income Redistribution versus poverty alleviation Pro-poor expenditures: some counter-intuitive findings. Concluding remarks

NIPFP Introduction Evolution of concept of equity in tax policy Horizontal and vertical equity concepts. Uneasy case for progressive taxation Limited effectiveness of tax/expenditure policy on redistribution Calibration of equitable fiscal policy- need to shift emphasis to human development and poverty alleviation

NIPFP Concept of Equity in Tax Policy Emphasis on vertical equity-achieving more equal distribution of incomes; High and differentiated tax rates Developed countries: differentiation of direct taxes Developing countries: differentiation in indirect taxes. Transitional economies: administered prices

NIPFP Redistributive Effects of Tax Policy Pechman - Okhner Study for US –Conclusion- US Tax system is not significantly progressive –Tax burden - 25% of family income –Top decile reduction 2.06 percentage points –Improvement in the lowest decile 0.12 percentage point. –Gini coefficient: – Most progressive: –Least progressive: –Effective tax rate : –MP21.9%25.3% –LP28.2%23.3%

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Redistributive Effects of Tax Policy Progressivity of Tax System in Chile –tax System close to proportional –Gini coefficient moderative regressive. –Insensitivity of income distribution to the tax system.

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Progressivity of Expenditures Transfers have bigger influence than taxes in redistribution. Distribution of incomes is quite insensitive to both tax and expenditures. Chile’s case distribution of transfers progressive 37.5% poorest quintile 28.1% next quintile; 3.2% richest quintile.

NIPFP Political Economy of Government Budgets Neither tax nor expenditure system is likely to alter basic pattern of income distribution Attempts to modify income distribution was fashionable half a century ago. Confiscatory tax rates: India 92%; US 95%; UK 91%. Efficient tax system: optimal taxation Expenditure has greater potential: public education and medical care. Middle income groups also benefit and access higher education better. Income distribution changes achieved is not much

NIPFP Political Economy of Redistribution Role of education in redistribution - socioeconomic mobility, demographic transition, targeting, productivity, Should the governments bother to redistribute? –Calibrating non-regressive taxes –Incidence assumptions- corporation tax More desirable option: reducing poverty.

NIPFP Returns to Rural Investments in India

NIPFP Returns to Rural Investment in China

NIPFP Returns to Rural Investment in China

NIPFP Concluding Remarks Equity in fiscal policy: Shift of emphasis from “reducing the incomes of the rich” to “increasing the incomes of the poor”. Progressive rate schedule need not necessarily result in an equitable tax system Income redistribution better achieved through expenditure side Shift of emphasis from income redistribution to poverty alleviation. Need to avoid regressive tax policies to finance anti poverty interventions. Direct spending on anti-poverty interventions is not necessarily the most efficient way of reducing poverty.