By Nora Lustig, Samuel Z. Stone Professor of Latin American Economics, Director of the Commitment to Equity Institute at Tulane University, nonresident senior fellow of the Center for Global Development and the Inter-American Dialogue, and non-resident senior research fellow at UNU-WIDER 1
It is not uncommon that the net effect of taxing and spending by governments is to leave the poor worse off in terms of their actual consumption of private goods and services. Comparable fiscal incidence analysis for 28 low- and middle-income countries4 reveals that, although fiscal systems are always equalising, they not always reduce poverty (Lustig, 2017).5
The ultra-poor in Ghana, Nicaragua and Tanzania, the extreme poor in Armenia, Ethiopia and Guatemala, and the moderate poor in Brazil, Bolivia, the Dominican Republic, El Salvador, Honduras, Peru and Sri Lanka, are – on average – net payers into the fiscal system.6 The extent of this phenomenon can be high enough so that, in some countries, fiscal policy increases poverty. This means that a significant number of the market income poor (non-poor) were made poorer (poor) by taxes and transfers. For example, in Ethiopia, Tanzania, Ghana, Nicaragua and Guatemala, the headcount ratio measured with the international extreme poverty line of USD 1.25 (in 2005 purchasing power parity per day) is higher for income after taxes and transfers (excluding in-kind transfers in education and health) than for market income. Moreover, to varying degrees, in all 28 countries a portion of the poor are net payers into the fiscal system and are thus impoverished by the fiscal system. Fiscal impoverishment can be quite pervasive and in low-income countries larger in magnitude than fiscal gains to the poor.7
This startling result is primarily the consequence of consumption taxes. Consumption taxes frequently exceed in size the benefits received by the poor in the form of cash transfers and consumption subsidies.
Ultimately, these results are a warning to the international community and governments worldwide. Achieving the SDGs will depend in part on the ability of governments to improve their tax collection and enforcement systems. However, in low-income countries where a large share of the population lives in extreme poverty by definition, it may prove difficult to reconcile the needed investments in infrastructure and public services with the competing need to protect low-income households that may otherwise be made worse off from the taxes levied to finance infrastructure investments. To achieve the SDGs will require continued redistribution from advanced countries to low-income ones.
1.↩ Based on Nora Lustig “The Sustainable Development Goals, Domestic Resource Mobilization and the Poor,” CEQ Working Paper 61 (Commitment to Equity Institute, Tulane University), January 2017.This research has been possible thanks to the generous support of the Bill & Melinda Gates Foundation.
2.↩ For the document endorsed by the General Assembly in September 2015, please see https://sustainabledevelopment.un.org/post2015/transformingourworld. The Sustainable Development Goals and their targets can be found here https://sustainabledevelopment.un.org/?menu=1300.
3.↩ The conference on Financing for Development in July 2015, for example, set the framework for where the resources to achieve the SDGs and other commitments endorsed in the numerous global and regional compacts will need to come from. Document endorsed by the General Assembly of the United Nations on July 27, 2015: “Addis Ababa Action Agenda of the Third International Conference on Financing for Development.http://www.un.org/esa/ffd/wp-content/uploads/2015/08/AAAA_Outcome.pdf
4.↩ The World Bank classifies countries as follows. Low-income: USD 1,025 or less; lower-middle-income: USD 1,026-4,035; upper-middle-income: USD 4,036-12,475; and, high-income: USD 12,476 or more. The classification uses Gross National Income per capita calculated with the World Bank Atlas Method, September 2016: http://data.worldbank.org/about/country-and-lending-groups. Using this classification, the group included three low-income countries: Ethiopia, Tanzania and Uganda; ten lower middle-income countries: Armenia, Bolivia, El Salvador, Ghana, Guatemala, Honduras, Indonesia, Nicaragua, Sri Lanka and Tunisia; twelve upper middle-income countries: Brazil, Colombia, Costa Rica, Dominican Republic, Ecuador, Georgia, Iran, Jordan, Mexico, Peru, Russia and South Africa; two high-income countries: Chile, and Uruguay; one unclassified (upper middle-income, most likely): Argentina; and, one advanced economy: the United States.
5.↩ Lustig. 2017. “Fiscal Policy, Income Redistribution and Poverty Reduction in Low and Middle Income Countries,” CEQ Working Paper 54 (CEQ Institute, Tulane University), January. The fiscal policy instruments included in the study were: personal income and payroll taxes, direct transfers, consumption taxes, consumption subsidies and transfers in-kind (in the form of education and healthcare services). For more information, visit www.commitmentoequity.org.
6.↩ Ultra-poor, extreme poor, and moderate poor are defined as those individuals whose income (consumption) is below USD1.25, USD 2.50, and USD 4, respectively, in 2005 purchasing power parity per day.
7.↩ Higgins, Sean and Nora Lustig. 2016. “Can a Poverty-Reducing and ProgressiveTax and Transfer System Hurt the Poor?” Journal of Development Economics 122, pp. 63-75.Transfer System Hurt the Poor?” Journal of Development Economics 122, pp. 63-75.