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The CEQ Institute entered into a Fiscal Analysis Partnership with the Millennium Challenge Corporation
We are pleased to announce that the Commitment to Equity (CEQ) Institute entered into a Fiscal Analysis Partnership with the Millennium Challenge Corporation (MCC) on September 30, 2020. The MCC, an independent U.S. Government foreign aid agency, is guided by its founding principle that aid is most effective when it reinforces good governance, economic freedom and investments in people.
The two-and-a-half year $449,956.39 award will:
- Integrate CEQ-developed fiscal incidence analysis methods and tools with the MCC’s growth diagnostic toolkit. This will enable distributional analyses of the welfare impacts of MCC Compact-designed program investments early in the MCC Compact design and negotiation processes.
- Develop practical applications for incidence, distributional analysis, and for quantifying the current impact on inequality and poverty of public investments in infrastructure, including infrastructure investments carried out by subnational government levels such as municipalities, districts, or provinces.
- Develop fiscal incidence analysis and toolkits for use by MCC and partner country governments and transfer capacity for the application and utilization of these tools in real world settings, via training sessions, workshops, and other dissemination.
Working Paper 93: The Impact of Taxes and Transfers on Income Inequality, Poverty, and the Urban-Rural and Regional Income Gaps in China
China is characterized by high prefiscal overall, urban-rural and regional inequality. Applying standard fiscal incidence analysis, we estimate the redistributive effect of taxes and social spending on income distribution and poverty. In particular, we estimate the effect of direct and indirect taxes, direct cash transfers, contributory pensions, indirect subsidies, and in-kind transfers (education and health) on overall inequality and poverty, the urban-rural income gap, and income inequality between regions. The results show that the fiscal system is inequality- reducing overall and between regions. However, the urban-rural gap rises and the postfiscal headcount ratio is higher than prefiscal poverty in rural areas. Both are undesirable outcomes given that rural residents are poorer. They are largely explained by the considerably lower contributory pensions received by rural residents.
The redistributive impact of fiscal policy indicator: A new global standard for assessing government effectiveness in tackling inequality within the SDG framework
What do the World Bank, Oxfam, and the Commitment to Equity Institute have in common? All seek to reduce inequality through policy choices; find fiscal policies critical to this end; and have taken collective action to ensure the Sustainable Development Goals (SDGs) framework is well-equipped to monitor the distributional impact of taxes and transfers.
The SDGs are intended to provide policy direction in critical areas for people’s and the planet’s well-being, and to measure governments’ progress in those areas. Including SDG 10 (“Reduce inequality within and among countries”) in the framework has meant officially recognizing inequality as a constraint to development and poverty eradication, and therefore as a concern for national and international policy making. However, until now, SDG 10 had no corresponding indicator to monitor the impact of tax and transfers on income distribution.
The welcome news is that such monitoring is now possible within SDG 10 thanks to the introduction of indicator 10.4.2 – the Redistributive Impact of Fiscal Policy – which is the difference between prefiscal and postfiscal income inequality (as measured by the Gini coefficient). In March 2020, the United Nations Statistical Commission ratified the adoption of the indicator, following a proposal submitted by Oxfam, CEQ, and the World Bank to the Inter Agency and Expert Group (IAEG)-SDGs 2020 Comprehensive Review.
Fighting poverty and inequality requires a systematic analysis of fiscal policies, accompanied by country-level scrutiny of the impact of the different components of the fiscal system. Developed by the Commitment to Equity Institute (CEQ) at Tulane University, the Redistributive Impact of Fiscal Policy indicator is already being used by both the World Bank and IMF to guide their own programs and policy advice to countries. The indicator is also included in the Commitment to Reducing Inequality Index developed by Development Finance International and Oxfam. With its inclusion among the SDG indicators, policy analysts, policy makers and policy advocates throughout the world will be given the opportunity to systematically track progress in fiscal policy’s contribution to more equitable societies.
The indicator is available for at least one year in a significant number of countries and can be estimated for any country, using household surveys and government fiscal or budgetary data. The World Bank serves as custodian agency for the indicator, with the CEQ and the OECD as data compilers. All will continue to play a vital role in helping countries generate and harmonize the data necessary for compiling the indicator. The aim is to ensure all countries have the data required to estimate both postfiscal consumable income (which includes indirect taxes and subsidies) and disposable income.
It will provide a picture of the adoption of progressive fiscal policies at the national level and become a point of reference for international institutions providing policy advice to countries.
For example, the World Bank already uses this and related indicators to assess the equity impacts of taxes and spending and to inform its policy advice on equitable fiscal reform. Similarly, the International Monetary Fund (IMF), which is seeking to integrate inequality into its work, could systematically include this indicator in its country surveillance analysis. The Addis Tax Initiative – the group of governments committed to domestic revenue mobilization – has already adopted an indicator that measures the Gini impact of country’s tax systems as part of its monitoring framework. However, as we know, to assess the redistributive impact of fiscal policy, it is essential to look at the spending side as well. The newly adopted indicator would fill that gap.
social spending than Bolivia, which has higher levels of social spending.For example, comparing the market income and consumable income Gini coefficients shows that fiscal policies reduced income inequality by 19% in Georgia and by 1.5% in Guatemala. Indirect taxes and subsidies frequently — but not always — have a regressive impact, while net direct taxes and social transfers are always equalizing. The extent of redistribution depends both on size and progressivity. For instance, Uruguay achieves more redistribution from its
Ultimately, it is the amount of resources and the specific combination of taxation and spending that determines the net changes in distribution. Importantly though, the impact on poverty may differ from the impact on inequality. While analyses show that fiscal policy always reduces inequality — albeit sometimes very negligibly — that is not true for poverty. For example, in El Salvador, Ethiopia and Nicaragua, the poor are net payers into the fiscal system, and in Armenia the tax system is less progressive (though improving in the last few years), due to a combination of high regressive consumption taxes and cash transfers that are not sufficiently pro-poor.
Monitoring change in the Redistributive Impact of Fiscal Policy indicator over time at the country level will be even more critical in the aftermath of the COVID-19 pandemic, as the short and medium-term policy response will demand huge amounts of public spending to address the health emergency and the economic fallout. After the pandemic,in ensuring that additional spending and revenues are leveraged in equitable ways, so that they contribute to reducing poverty and inequality throughout the world.
Monday July 1, 2019
This blog post was jointly authored by Nora Lustig,
This week over 170 policymakers, government officials, and members of academia, civil society and international organizations will gather in Berlin to discuss the future of the Addis Tax Initiative (ATI). The overarching goal of the ATI is to improve domestic revenue mobilization (DRM) in order to finance the Sustainable Development Goals (SDGs). More than 55 countries, regional and international organisations have joined the ATI, which commits donors to collectively double their assistance to DRM, developing countries to step up their tax collection efforts, and all members to ensure “policy coherence for development.” However, noticeably absent from the ATI’s progress monitoring is the issue of equity. Indeed, analysis by Oxfam finds that only 7% of DRM support reported by ATI donors in 2017 contained clear goals related to equity or fairness in revenue systems.
The importance of equity
If the primary goal of DRM projects and reforms is simply to collect more revenue, this can have negative consequences for development efforts. For example, revenue targets (like collecting 15% of GDP in tax) can create perverse incentives to collect wherever it is most feasible – which can harm those without political power such as the poor or women the most. Tax and transfer systems in low and middle-income countries are, in general, far less effective than those in OECD countries at reducing poverty and inequality. In fact, research by the CEQ Institute shows that in 16 out of the 29 countries analyzed, taxes and direct transfers to the poor actually increased income poverty. Of course, part of that pattern reflects the inadequacy of social spending, but it equally reflects the need for a greater focus on the equity implications of tax reforms.
Priority areas for increasing equity in DRM
Given that in low and middle-income countries, taxes on consumption currently make up over 60% of revenues, there is a great deal of room for making tax systems more equitable at the national level. We suggest four priority areas for reform:
1. Strengthening taxation of income and wealth: OECD countries collect about 10% of GDP in personal income taxes, while non-OECD countries collect only slightly more than 2% of GDP on average. There is much developing countries can do to better tax professional incomes, increase the progressivity of income tax schedules, and tax inheritance and capital gains. When it comes to wealth, it remains largely undertaxed, despite a surge in ultra-high net worth individuals (especially in developing countries). An increasing amount of that wealth is being concentrated in real estate, yet property tax collection is similarly low. Non-OECD countries on average collect merely 0.5% of GDP from property taxes (compared to 2-3% in OECD countries). If low and middle-income countries as a group could reach 1.5%, this would be equivalent to an additional $28.9 billion in government coffers annually: more than total combined aid disbursed by Canada, France, Netherlands, Norway and Sweden in 2017.
2. Rationalizing the use of tax incentives: Tax incentives to attract investment can play a legitimate role in economic policy. Unfortunately, studies suggest that tax incentives in developing countries frequently continue to be characterized by excessive discretion, poor monitoring and little transparency. The result is reduced revenue and little new investment – in effect, a handout to corporations and wealthy interests. More transparent and accountable governance of tax incentives is needed.
3. Reducing the burden of consumption taxes and informal and nuisance taxes on the poor: While many assume that the poor do not pay much tax in low-income countries, they actually bear a heavy fiscal burden due to a wide array of consumption and informal taxes, small subnational taxes and levies, and formal and informal user fees to access essential services. In low and middle-income countries, consumption taxes make a significant proportion of the poor poorer than they were before taxes and transfers. Unless the poor can be sufficiently compensated with transfers, exemptions for basic foodstuffs and other essential goods may thus be necessary. Studies from Sierra Leone and the DRC suggest that total formal and informal burdens of direct taxes, levies and user fees make up as much as 10-20% of the incomes of poor households. Limiting these burdens should be given significantly greater priority.
4. Enhancing the participation of accountability stakeholders: Civil society organizations, academic institutions, women’s rights groups, and journalists have a critical role to play in monitoring and pressing for increased fairness in tax systems, voicing the concerns of the vulnerable, and advocating for the translation of tax revenues into public benefits. Nevertheless, in 2017, only 7% of DRM aid (reported to ATI) supported these actors.
Parallel action is also needed at the global level to make the ATI’s third commitment to “policy coherence” a reality:
1. Reforming the international tax system: While the BEPS Action Plan was a useful first step in trying to combat aggressive tax avoidance, it is not enough. Low-income countries continue to be disadvantaged by restrictive tax treaties and often still have little voice in global decisions that impact their taxing rights. All countries should be given the opportunity to raise their voice in the BEPS 2.0 negotiations, even if they are not members of the OECD Inclusive Framework – a situation that pertains to half of ATI partner countries. Meanwhile, existing international rules continue to be difficult to implement in lower-income countries, which are substantially more dependent on corporate tax revenues than OECD countries. A continued push for developing country taxing rights and priorities, including simplified approaches to enforcement, is needed.
2. Increasing cooperation on tackling offshore tax avoidance and evasion by wealthy individuals: It is estimated that Africans hold $500 billion in financial wealth alone offshore, which results in governments losing around $15 billion per year in unpaid taxes. Progress must be made to include developing countries effectively in automatic exchange of information processes and ensure effective collaboration in cases of tax evasion, while strengthening rules on beneficial ownership.
3. Continuing external support: In low-income countries, even the most substantial improvements in DRM will not generate enough revenue to finance adequate social protection and human development floors. External support such as aid will therefore remain critically important in pursuing equity at the global level.
Prioritizing equity in the ATI agenda
The theme of this week’s conference is “Towards a Roadmap for the ATI post-2020.” In drawing that roadmap, we are calling on ATI members to focus more explicitly on equity and inclusion. Along with the priorities outlined above, we propose that members of the ATI:
1. Adopt specific indicators on revenue composition in monitoring progress on Commitment 2, in order to prioritize not only collecting more revenue, but from more progressive sources, like direct taxes on income and property, rather than indirect taxes on consumption.
2. Regularly assess, under Commitment 3, tax spillovers and the distributional impact of tax policy reforms. ATI donor countries should conduct tax spillover analyses to ensure that their own corporate tax rules and practices, and tax treaties, are not undermining their DRM support. ATI partner countries should conduct distributional impact assessments in order to ensure the drive for more revenue does not come at the expense of achieving the SDGs, particularly on inequality and poverty.
3. Make a collective commitment to increase tax transparency. All government ATI members should commit to transparency on data about tax collection, tax policy decisions, administrative practices, and the amount of revenue raised from each type of source. In addition, all ATI members should commit to encouraging and facilitating the engagement of accountability stakeholders, and to support the effective representation of developing countries in international policy-making forums.
For more on this topic, read our brief: What Might an Agenda for Equitable Taxation Look Like?
Image credit: © Kelley Lynch (USAID Ethiopia) / Flickr (CC BY-NC 2.0)
May 13-14, 2019
Tulane University, New Orleans, Louisiana, USA
The Red para el Estudio de la Economía Política de América Latina hosted it’s 6th Annual Conference at Tulane University. Nora Lustig presented a keynote lecture, “Inequality in Latin America: Markets and Politics”