The Impact of the Tax System and Social Expenditure on the Distribution of Income and Poverty in Latin America

Produced by: 
Center for Global Development
Available from: 
March 2017
Paper author(s): 
Nora Lustig
Topic: 
Poverty - Inequality - Aid Effectiveness
Fiscal Policy - Public and Welfare Economics
Year: 
2017

This article presents results on the impact of fiscal policy on inequality and poverty in sixteen Latin American countries around 2010. The countries that redistribute the most are Argentina, Brazil, Costa Rica and Uruguay, and the least, Guatemala, Honduras and Peru. At higher social spending, greater redistribution is achieved, but countries with a similar level of social spending show different levels of redistribution which suggests that other factors such as the composition and targeting of the expenditures are involved in determining the redistributive effect beyond its size. Fiscal policy reduces extreme poverty in twelve countries. However, the incidence of poverty after taxes, subsidies and monetary transfers is higher than the pre-fisc poverty rate in Bolivia, Guatemala, Honduras, and Nicaragua, even when fiscal policy does reduce inequality. Expenditure on pre-school and primary education is equalizing and pro-poor in all countries. Spending on secondary education is equalizing in all countries and also pro-poor in some countries but not all. Expenditure on tertiary education is never pro-poor, but it is equalizing, with the exception of Guatemala, where it is regressive and unequalizing and in Venezuela, where its redistributive effect is zero. Health spending is always equalizing but it is pro-poor only in Argentina, Brazil, Chile, Costa Rica, Ecuador, the Dominican Republic, Uruguay and Venezuela.

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