Fiscal Policy and Income Inequality

Low levels of revenue from direct personal taxes, limited targeting of public spending and the small size of direct transfers to the poorest households explain the low (almost non-existent) redistributive impact of public finances. The region has a level of inequality in the distribution of personal income that is substantially higher than in other regions of the world, with an average Gini coefficient of 0.53. The country in the region with the least inequality is still more unequal than any member of the OECD. recent studies17 show that since 2000 there has been some decline in inequality as a result of increased social spending, and in particular due to the impact of conditional cash transfer programmes (the Jefas y Jefes del Hogar programme in Argentina, Bolsa Escola and Bolsa Familia in Brazil, Progresa and oportunidades in Mexico, and programmes providing benefits in kind in Peru). There has also been a reduction in earnings by educational attainment (relationship of salary to additional years of study). However, the latter is temporary, while the majority of public spending continues to be neutral or even regressive.

The tax structure in Latin America does not favour the redistributive function of public finance. There is a fiscal "empty box" (which is occupied in the more developed countries), as even countries that have higher tax rates (e.g. Argentina, Brazil and Uruguay) have tax structures biased towards indirect taxes.¹⁸ assessments of different taxes in three countries in the region (Ecuador, Guatemala and Paraguay) show Vat to be mostly regressive, while income tax is progressive, but represents a smaller percentage of total revenue.¹⁹ in general, income distribution improves through taxation and spending in industrialised countries, while in developing countries there are not adequate redistributive policies to achieve a comparable degree of equality.²⁰

The level of income inequality in Latin America, measured by Gini coefficients before taxes, transfers and public services, is not too much higher than in OECD economies.²¹ However, once the effects of the limited effective redistribution from the tax system and economic and social benefits are included, the differences are significant (Figure 3.7).

The redistributive effect of fiscal policy between Chile and Mexico is different from that of the other OECD economies. the low effective redistribution of the tax system in these two countries can be explained mainly by the limited effect of cash transfers. In the OECD, the reduction in the Gini index due to cash transfers is about eight points, while in Chile and Mexico the reduction is less than two points. this is a result of lower social spending in the region on these types of instruments (in OECD economies social spending on cash transfers is about 12% of GDP versus only 6% and 3% of GDP in Chile and Mexico, respectively). In addition, the combined impact of social security contributions and income taxes on reducing the Gini is greater in OECD economies. While in the group of industrial countries this decline is on average about 3.5 points, in Mexico the reduction is about 2.0 points and in Chile, only 1.0 poi