INEQUALITY AND FISCAL REDISTRIBUTION IN MIDDLE INCOME COUNTRIES Brazil, Chile, Colombia, Indonesia, Mexico, Peru and South Africa

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1 INEQUALITY AND FISCAL REDISTRIBUTION IN MIDDLE INCOME COUNTRIES Brazil, Chile, Colombia, Indonesia, Mexico, Peru and South Africa Nora LusGg Desafios do Desenvolvimento Brasileiro Seminário em homenagem a Albert Fishlow IEPE/CdG Rio de Janeiro, Brasil 3 de julho de 2015

2 What is CEQ: DescripGon of Project The CEQ project is an inibabve of: The Center for Inter- American Policy and Research (CIPR) and the Department of Economics, Tulane University, the Inter- American Dialogue and the Center for Global Development CEQ s goals are to: Foster evidence- based policy discussion Assist governments, mulblateral insbtubons, and nongovernmental organizabons in their efforts to build more equitable sociebes 2

3 What is CEQ: the CEQ Assessment The CEQ project developed the CEQ Assessment, a diagnosbc instrument Comprehensive framework to analyze the effect of taxabon and public spending on inequality and poverty Method: Fiscal Incidence analysis and qualitabve diagnosbc approach ApplicaBon of a common methodology across countries makes cross- country comparisons more accurate Methodology is designed to be as comprehensive as possible without sacrificing detail in any parbcular component of the analysis 3

4 4

5 Paper based on following CEQ studies: Brazil: Higgins, Sean and Claudiney Pereira The Effects of Brazil s TaxaBon and Social Spending on the DistribuBon of Household Income. In LusBg, Nora, Carola Pessino and John Scob Editors. The RedistribuBve Impact of Taxes and Social Spending in LaBn America. Special Issue. Public Finance Review, May, Volume 42, Issue 3 and CEQ Master Workbook: Brazil, November 4. Chile: Ruiz- Tagle, Jaime and Dante Contreras CEQ Master Workbook: Chile, August. Colombia: Melendez, Marcela CEQ Master Workbook: Colombia, November 21, Tulane University. Indonesia:Aear, R., J. Jellema, and M. Wai- Poi, "Fiscal Policy, RedistribuBon, and Inequality in Indonesia," in G. Inchauste and N. LusBg (eds), The DistribuBonal Impact of Fiscal Policy: Experience from Developing Countries, forthcoming. Mexico: Scob, John RedistribuBve Impact and Efficiency of Mexico s Fiscal System. In LusBg, Nora, Carola Pessino and John Scob Editors. The RedistribuBve Impact of Taxes and Social Spending in LaBn America. Special Issue. Public Finance Review, May, Volume 42, Issue 3. Peru: Jaramillo, Miguel The Incidence of Social Spending and Taxes in Peru. In LusBg, Nora, Carola Pessino and John Scob Editors. The RedistribuBve Impact of Taxes and Social Spending in LaBn America. Special Issue. Public Finance Review, May, Volume 42, Issue 3 and CEQ Master Workbook: Peru, June 21, South Africa: Inchauste, Gabriela, Nora LusBg, Mashekwa Maboshe, Catriona Purfield and Ingrid Wollard The DistribuBonal Impact of Fiscal Policy in South Africa. Policy Research Working Paper 7194, The World Bank, February. 5

6 TRANSFERS Market Income Wages and salaries, income from capital, private transfers (remittances, private pensions, etc.) before taxes, social security contributions and government transfers AND contributory social insurance old-age pensions ONLY in the case in which pensions are treated as deferred income TAXES Direct cash and near cash transfers: conditional and unconditional cash transfers, school feeding programs, free food transfers, etc. + Personal income taxes AND employee contributions to social security ONLY in the case that contributory pensions are treated as transfers Indirect subsidies: energy, food and other general or targeted price subsidies Disposable Income + Indirect taxes: VAT, excise taxes and other indirect taxes In-kind transfers: free or subsidized government services in education and health Post-fiscal (or Consumable) Income + Co-payments, user fees Final Income 6

7 Figure 1: Size and composition of government budgets (circa 2010) Panel a: Composition of Social Spending as a Share of GDP (rankednbynsocialnspending/gdp) 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% Indonesia*(2012) Peru(2009) Chile**(2009) Colombia(2010) DirectNTransfers Education Health ContributoryNPensions OtherNSocialNSpending GNINperNcapitaN(2011NPPP) Mexico(2010) South Africa***(2010) Brazil(2009) Seven Countries OECD 20,000 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,

8 Panel b: Composition of Total Government Revenues as a Share of GDP (rankedjbyjtotaljgovernmentjrevenue/gdp) 60.00% 50.00% 40.00% 30.00% 20.00% 10.00% 0.00% Indonesia*(2012) Colombia(2010) Chile**(2009) Mexico(2010) Peru(2009) South Africa***(2010) DirectJTaxes IndirectJandJOtherJTaxes SocialJSecurityJContributions OtherJRevenues GNIJperJcapitaJ(2011JPPP) Brazil(2009) 20,000 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,

9 Figure 2: Fiscal Policy and Inequality (circa 2010) (Gini Coefficient for Market, Disposable, Post-fiscal and Final Income) Panel a: Pensions in Market Income Brazil (2009) Chile* (2009) Colombia (2010) Indonesia** (2012) Mexico (2010) Peru (2009) SA** (2010) MarketHIncome DisposableHIncome PostKfiscalHIncome FinalHIncome 9

10 Panel b: Pensions as Transfers Brazil (2009) Chile* (2009) Colombia (2010) Indonesia** (2012) Mexico (2010) Peru (2009) MarketDIncome DisposableDIncome PostGfiscalDIncome FinalDIncome 10

11 Table 1: Gini Coefficient for Pre-pension and Post-pension Market Income (circa 2010) Brazil' (2009) Chile a (2009) Colombia' (2010) Indonesia b' ' (2012) Mexico' (2008) Peru' (2009) South' Africa c' ' (2010) Pension'as'%'GDP 9.06% 3.87% 3.14% 0.76% 2.60% 0.90% 0.97% Gini'Market'Income'w/o'Pensions NN Gini'Market'Income'w/Pensions Change'in'% 3.6% N0.04% 0.7% 0.1% N0.4% N0.3% NN Change'in'ppts N N N NN 11

12 A. Redistribution and market income inequality ZAF BRA RedistribuiveDEffect MEX CHL PER COL IDN GiniDMarketDIncome 12

13 B. Final income inequality and market income inequality 0.60 ZAF 0.55 COL Gini<Final<Income PER MEX CHL BRA 0.40 IDN Gini<Market<Income 13

14 Figure 4. Redistribution and social spending, ZAF RestributiveCEffect CHL MEX BRA IDN PER COL % 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% SocialCSpending 14

15 Redistributive Effect: Brazil, Chile, Colombia, Indonesia, Mexico, Peru, South Africa, EU and the United States (Change in Gini Points: Market to Disposable Income; circa 2010) Redistributive'Effect:'Market'to'Disposable Market'Income'Gini Pension1as1Market1Income Market1Income1Gini,1Pensions1Mkt1Inc Pension1as1Transfer Market1Income1Gini,1Pensions1as1Transf 15

16 Marginal Contribution of Taxes and Transfers (circa 2010) (Pensions as Market Income) Panel a. Redistributive Effect from Market to Disposable Brazil Chile* Colombia Indonesia** Mexico Peru SA*** DirectFtaxes DirectFtransfers RedistributiveFEffect 16

17 Panel b. Redistributive Effect from Market to Post-Fiscal Brazil Chile* Colombia Indonesia** Mexico Peru SA*** DirectGtaxes DirectGtransfers IndirectGtaxes IndirectGsubsidies RedistributiveGEffect 17

18 Fiscal Policy and Poverty Reduction (circa 2010) (Change in Headcount Ratio from Market to Post-fiscal Income for Pensions in Market Income and Pensions in Transfers; in %) a 15.0% 10.0% 5.0% 0.0%!5.0%!10.0%!15.0%!20.0%!25.0%!30.0%!35.0% Brazil/(2009) Colombia (2010) Indonesia* (2012) Peru/(2009) Mexico/(2010) South/Africa** (2010) Chile*** (2009) Pensions/as/Market/Income Pensions/as/Transfer 18

19 Net Payers to the Fiscal System (circa 2010) Panel a: Pensions as Market Income NetBReceivers NetBPayers Indonesia*(2012) Chile**(2009) Colombia(2010) Mexico(2010) Peru(2009) South Africa***(2010) Brazil(2009) y< <=y< <=y<4 4<=y<10 10<=y<50 y>=50 19

20 Progressivity and Pro-poorness of Education and Health Spending. Summary of Results Pro$poor&CC&is& negative Educ&Total Pre$school Primary Secondary Tertiary Health Same&per& capita&for&all;& CC&=0 Progressive&CC& Pro$poor&CC&is& positive&but& negative lower&than& market& income&gini Same&per& capita&for&all;& CC&=0 Progressive&CC& Pro$poor&CC&is& positive&but& negative lower&than& market& income&gini Same&per& capita&for&all;& CC&=0 Progressive&CC& Pro$poor&CC&is& positive&but& negative lower&than& market& income&gini Same&per& capita&for&all;& CC&=0 Progressive&CC& Pro$poor&CC&is& positive&but& negative lower&than& market& income&gini Same&per& capita&for&all;& CC&=0 Progressive&CC& positive&but& lower&than& market& income&gini Regressive&CC& positive&and& higher&than& market& income&gini Brazil&(2009) &Chile&(2009) Colombia&(2010) Indonesia&(2012) + na Mexico&(2010) Peru&(2009) South&Africa&(2010) *CC&is&almost&equal&to&market&income&Gini&coefficient If&the&Concentration&Coefficient&is&higher&or&equal&to&$0.5&but&not&higher&than&0.5,&it&was&considered&equal&to&0. Pro$poor&CC&is& negative Same&per& capita&for&all;& CC&=0 Progressive&CC& positive&but& lower&than& market& income&gini 20

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