There is a significant body of literature on the issue of inequality and redistribution, but it provides conflicting evidence and conclusions, in particular relating to the impact of progressive taxation on economic growth. On the one hand, there is quantitative and qualitative evidence that a shift towards progressive taxes can be harmful to growth (see Economic growth), though growth is good for the poor, according to some econometric analyses (Dollar et al., 2013). On the other hand, econometric analysis shows that reducing inequality can create improved and more sustainable economic growth in the longer term (Ostry et al., 2014).
Bird and Zolt (2014) argue that in many developing countries personal income taxes have done little to reduce inequality and are not a viable means of redistribution. Such taxes are also politically challenging to implement (Ardanaz & Scartascini, 2013). In countries where annual consumption per capita is under $2,000, redistribution through taxation would require placing politically infeasible tax burdens (marginal tax rates in excess of 100 percent) on the richer citizens (Ravallion, 2010).
Bird and Zolt (2014) suggest focusing on improving improving the design of consumption taxes, and adjusting expenditure programmes to compensate for the impact on the poor. Lustig et al. (2012) advocate more cash transfer programmes over tax reform to address inequality. Other experts suggest that when designing tax policy, there is a need for a balance between growth objectives and redistribution objectives, and for the poorest countries to shift towards redistributive tax policies only once a sufficient income per capita has been reached (Ravallion, 2010).
Evidence suggests that taxes, and in particular income and consumption taxes, can be gender-biased (Grown & Valodia, 2010). Women and men tend to consume different goods and services, and influence and manage household income and expenditure differently. Targeted consumption tax reform measures can address consumption patterns to improve gender equality outcomes (e.g. through zero-rating on children’s clothes, which tends to impact women) as well as to change behaviour (e.g. through higher taxes on private transport fuel, which impacts men).
Key reading
Ostry, J., Berg, A., & Tsangarides, C. (2014). Redistribution, Inequality, and Growth (IMF Staff Discussion Note). Washington, D.C: International Monetary Fund (IMF).
This literature review and econometric analysis on OECD and non-OECD country data finds that: (1) more unequal societies tend to redistribute more; (2) lower net inequality is robustly correlated with faster and more durable growth; (3) redistribution appears generally benign in terms of its impact on growth, except in extreme cases where it may have direct negative effects on growth. The authors highlight the importance of looking at longer term (i.e. at least five-year) growth in analysis of growth impacts of redistribution and inequality and conclude it is a mistake to focus on growth and ignore inequality. This is not only because inequality may be ethically undesirable but also because the resulting growth may be low and unsustainable.
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Bird, R. M., & Zolt, E. M. (2014). Redistribution via Taxation: The Limited Role of the Personal Income Tax in Developing Countries. Annals of Economics and Finance, 15(2), 625-683.
This article reviews quantitative and qualitative literature on the benefit of relying on income tax, as opposed to other taxes, for redistribution in developing countries. In high-income countries, the personal income tax has long been viewed as the primary instrument for redistributing income and wealth. The study finds that personal income tax plays a small role in the tax systems of developing countries, has done little to reduce inequality in many developing countries, and involves significant administrative, compliance, economic efficiency and political costs. The authors argue that it is unrealistic to believe that personal income taxes can have a meaningful impact on distribution and that countries should instead reform expenditure programmes to target resources to the poor. In particular they should consider the distributional impacts of consumption taxes, which dominate the tax structures of developing countries.
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Grown, C., & Valodia, I. (Eds.). (2010). Taxation and Gender Equity: A Comparative Analysis of Direct and Indirect Taxes in Developing and Developed Countries. Abingdon: Routledge.
This book reviews evidence on the gender dimensions of personal income taxes, value-added excise and fuel taxes in Argentina, Ghana, India, Mexico, Morocco, South Africa, Uganda, and the UK. It finds that tax codes may be biased against women, and contemporary tax reforms can increase the incidence of taxation on the poorest women while failing to generate enough revenue to fund the programmes needed to improve these women’s lives. To promote gender equality in taxation, policy-makers need to consider how taxes reinforce or challenge current gender and other social inequalities and how to design tax instruments so that such inequalities are overcome. The book advocates specific and targeted usage of the tax system to improve gender equality outcomes, such as making children’s clothing zero-rated for VAT, and increasing private vehicle fuel taxes but making household fuel zero-rated for VAT.
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- Ardanaz, M. & Scartascini, C. (2013). Inequality and Personal Income Taxation The Origins and Effects of Legislative Malapportionment. Comparative Political Studies, 46(12), 1636-1663. See document online
- Dollar, D., Kleineberg, T., & Kraay, A. (2013). Growth still is good for the poor (Policy Research Working Paper 6568). Washington, DC: World Bank. See document online
- Lustig, N., Gray-Molina, G., Higgins, S., Jaramillo, M., Jiménez, W., Paz, V., … Yañez, E. (2012). The impact of taxes and social spending on inequality and poverty in Argentina, Bolivia, Brazil, Mexico and Peru: A synthesis of results (Working Paper 311). Washington, DC: Center for Global Development. See document online
- Ravallion, M. (2010). Do poorer countries have less capacity for redistribution? (Policy Research Working Paper 5046). Washington, DC: World Bank. See document online