Fiscal policy and income inequality: the role of taxes and social spending
This report provides a comprehensive and updated survey of the available evidence on the combined impact of taxes and social spending (cash transfers and health and education in-kind transfers) on within-country income inequality and poverty. It also looks at studies of individual fiscal instruments across countries with different income levels.
Our analysis shows that incomes before taxes and transfers in lower-income countries are distributed more unequally than in others. We also show that in many countries, even in richer ones that are relatively equal, inequality is rising. Yet, within income country groups and geographic regions, there are high levels of heterogeneity in income inequality and poverty outcomes, both before and after the effects of fiscal policy are assessed. This heterogeneity suggests the importance of both political and social choices, as well as the design and implementation of policy. While lower-income countries have narrower tax bases and redistribute less than richer ones, there is evidence that social spending tends to expand as fiscal capacity expands. Even if richer countries are better equipped to address income inequality through tax and social spending systems, all countries can measure and improve the performance of policies to create more equitable and efficient outcomes.