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Fiscal redistribution - in regional science, the term "fiscal redistribution" means the redistribution of resources generated by the economy. There is a proportionate correlation between the percentage of public resources (investments) and the weight of the public sector in the economy. (Inchauste, G., Karver, 2019, p.646)

Although increasing income inequality has been observed in many countries, the varying experiences across countries, with inequality even decreasing in a sizeable share of countries, suggests that public policy and institutions play and important role in determining such outcomes.2 In this respect, fiscal redistribution (i.e., the transfer of income from higher to lower income households via tax and transfer schemes) has a key role to play in addressing income inequality. For instance, evidence from studies of fiscal redistribution shows that over threequarters of the difference in average disposable income inequality between advanced and Latin American countries (with the lowest and highest average disposable income inequality, respectively) is accounted for by differences in the extent of fiscal redistribution rather than by differences in market incomes (Bastagli, Coady and Gupta, 2015).

This paper focuses on the design of fiscal redistribution through income taxes and transfers in advanced and developing countries.3 In particular, it focuses on the growing debate on the relative merits of universal and targeted social assistance transfers in achieving income redistribution objectives (Atkinson, 2015; Brown, Ravallion, and van de Walle, 2017; Gentilini et al., 2020). It argues that the fixation of the policy debate on the narrow targeting of transfers to lower-income groups (i.e., avoiding leakage of transfers to higher-income groups) in large part reflects an unbalanced framing of the issue with an undesirably narrow focus on the transfer side of fiscal redistribution neglecting the potential redistributive role of taxes. It also reflects an overly narrow focus on incentive (or efficiency) costs with insufficient attention to the administrative, social and political costs of targeting that in practice affect the feasible set of redistributive taxes and transfers available to governments and which need to be balanced against efficiency costs.

Moreover, in reply to those who argue that if too large a share of tax revenues is in the form of regressive taxes the tax system cannot be used as an effective instrument to redistribute income, a number of commentators have pointed out that most countries achieve inequality reduction primarily through the transfer side of their budgets. 52 If the amount of fiscal redistribution is measured by focusing on the absolute change in the Gini coefficient of inequality before and after government taxes and transfers, across thirteen major industrialist countries on average about 25 percent of the change is accounted for by taxes and 75 percent by transfers. 53 Moreover, [*818] the proportion of the change due to transfers is generally higher in more egalitarian countries. For example, in Sweden, where the total change in the Gini coefficient due to fiscal redistribution was on average 0.218 in recent years, taxes accounted for only about 18 percent of the fiscal redistribution; whereas in the U.S., where the total change in the Gini coefficient due to fiscal redistribution was only 0.102, taxes accounted for about 45 percent of the change. 54 Of course, in part, the U.S. tax system plays a larger relative role in redistribution because transfers are so low in that country and do little to redistribute income; nevertheless, the fact that transfers can be relatively effective at reducing inequalities has led some commentators to suggest that progressive taxes are not needed for achieving a more equal society. 55

The policy decisions of governments, whether at the federal, provincial, or local level or in the public pension sector (Canada Pension Plan/Quebec Pension Plan (C/QPP]) have an impact on Canadians' pocketbooks. Families pay taxes in exchange for the benefits of government expenditure, such as unemployment insurance, health care, or defence. Of course, the exchange is not exact for all families—taxes may be either more or less than benefits received— and so there may be a broad relationship between a family's income and its gain or loss from the fiscal operations of government. This gain or loss may be called "fiscal redistribution." Fiscal redistribution could vary from the situation, at one extreme, where all tax revenues are collected from higher income groups and all benefits are distributed to lower income groups ("government as Robin Hood") to the other extreme, where lower income groups pay all of the taxes while higher income groups receive all of the benefits ("government as reverse Robin Hood").' This article examines where the Canadian public sector fits on this continuum by first apportioning, across all family income groups, both the amount of taxes paid and the amount of benefits received, and then attempting to determine the impact of fiscal redistribution across and between income groups.

If the main objective of the evaluation of a tax reform is to give empirical content to the redistributive effects of different tax systems before and after the reforms, a formal expression of the concept of redistribution is required. Redistribution is defined here as the shift of income which occurs in the post-tax distribution from high to low incomes. Hence, it can be measured by comparing the pre-tax Lorenz curve with the post-tax concentration curve. Our measure of redistributive effect is therefore defined as: Π [ ] RS = − ∫ L p L p dp XT X − 2 0 1 () () (2) where the superscript of ΠRS refers to Reynolds and Smolensky (1977) who applied this measure to the US tax system, and L p xf x dx X y ( ) ( ) = ∫ µ 0 0 1 ≤≤ = p p Fy and ( ) (3) L p x t x f x dx t X T y − = − − ∫ ( ) ( ( )) ( ) µ( ) 1 0 0 1 ≤≤ = p p Fy and ( ) (4) are, respectively, the Lorenz curve of pre-tax income ( x ) and the concentration curve with respect to pre-tax income of after-tax income ( x tx − ( ) ), with: p : the population shares of the pre-tax distribution f x( ) : the density function of x F x( ) : the distribution function of x µ : mean income (pre tax) t x( ) : the tax liability corresponding with taxable income x t : the average tax rate.

The present redistributive policy focus is on a particular type of government redistribution that may be called direct fiscal redistribution to the poor (hereafter DFRP). Fiscal redistribution refers here to redistribution of money and in-kind income among strata of households by means of both government spending and taxing (i.e., fiscal) activities. For example, increased generosity in public assistance payment levels and reliance upon progressive income as opposed to regressive sales taxes can provide positive fiscal redistribution. Direct fiscal redistribution refers to that part of such redistribution that can be accounted for in terms of government's relatively direct and immediate give-and-take of expenditures and taxes to and from income strata of households. Current evidence suggests that such redistribution is considerable in advanced capitalist political democracies, especially vis-à-vis the poor (e.g., Reynolds and Smolensky, 1977; Hicks and Swank, 1984b). During the 1970s DFRP apparently augmented the "pre-fisc" income share of poor households in the U.S. by over 100 percent (see Reynolds and Smolensky, 1977: 74 on the U.S.; and Hicks and Swank, 1984b on advanced capitalism).

Following Alesina and Rodrik’s paper redistribution is defined here as any policy that reduces the incentive to accumulate. Taking growth maximizing policies as a benchmark has its virtues since people appear to have difficulties disentangling the relationship between utility enhancing income growth and the distribution of income at each point in time. See, e.g. Amiel and Cowell (1999). Thus, any policy s5^s redistributes and lowers growth in the model.19

Few public initiatives in surface transportation are crafted and promoted mainly to further equity objectives. Once they are in the political arena, however, equity claims are generally prominent in debates about them. The most successful equity claims, historically, have been principally those in the second set (benefits should be proportional to payments) rather than the first (government should tilt in favor of the poor and weak). Two caveats, however. Redistribution is a significant if secondary theme of urban mass transit policy. And the defensive redistributive concept here labeled Do No Harm serves as an important constraint on initiatives in the overall surface transportation arena, ranging from construction proposals entailing displacement of residents to fiscal proposals that would accentuate current disparities between advantaged and disadvantaged groups.

TABLE 1 Equity Concepts

Economic transfers could be used as a substitute for existing federal controls over state and local decisionmaking. The current system of central regulation of state and local social services through federal conditional grant programs is an inherently clumsy method of remedying the local social service problems created by competition for investment and resource disparities among states in an integrated national economy. 46 Not only does the federal grant [*107] system short-circuit state and local political self-determination, but it also fails in practice to provide any significant redistribution of resources to needier jurisdictions. 47 A more effective and less intrusive strategy would reconstitute the existing system of fiscal federalism by using the federal tax system to transfer money from wealthier states and localities or those with fewer needy residents, to jurisdictions with less fiscal resources or more fiscal demands. Such a system of horizontal redistribution, which has functioned successfully in other federal systems including Canada and West Germany, 48 would provide states and localities with insurance against the consequences of interjurisdictional competition and reduce jurisdictional disparities in fiscal resources and needs. 49

These examples illustrate some of the reconstitutive initiatives that might be developed to replace the current system of centralized command and control. Other possibilities include expanded use of taxes or liability to discourage socially undesirable conduct, such as the operation of unsafe workplaces, and the expanded use of vouchers to promote diversity, innovation, and efficiency in housing, education, health care, and other social service programs. 50

The analysis above gives powerful reason to question the now-classic "political process" argument that is frequently invoked when concerns are expressed about the scant protections afforded the states under modern readings of the Tenth Amendment and other federalism provisions of the Constitution. 144 The argument, which could similarly be invoked in the context of the spending power, contends that there is no need for the federal courts to invalidate federal legislation that may encroach on the autonomy of the states because of the role that the states themselves play in the enactment of federal legislation. That is, the structure of the federal political process arguably affords the states ample protection against federal encroachments on their autonomy, including fiscal redistribution among the states, so there is simply no need for judicially imposed, external limits on Congress's spending power.

Consider the reasoning of Professor Herbert Wechsler who, along with Professor Jesse Choper, is the scholar with whom this argument is commonly associated. 145 Wechsler has observed that the Senate, in which all states are equally represented, "cannot fail to function as the guardian of [*533] state interests as such." 146 He has therefore concluded that "the Court is on weakest ground when it opposes its interpretation of the Constitution to that of Congress in the interest of the states, whose representatives control the legislative process and, by hypothesis, have broadly acquiesced in sanctioning the challenged Act of Congress." 147

Political boundaries are still necessary because they provide expectations about levels of governance. They also provide a basis upon which inter-communal relationships may be premised. However, often what happens within those political boundaries become matters of global concern. Federal states provide opportunities for the exercise of minority rights providing those rights are not, in turn, employed to abuse the inherent rights of others Federalism in an era of devolution may very well be a reflection of the tendency towards both the delivery of government services at the most proximate level (e.g., the European concept of subsidiarity) 68 and, the trend towards smaller government - the New Public Management. In some instances this has been termed "asymmetrical federalism" (Tarlton, 1965; Watts, 1996, 57). The difficulty with the asymmetrical concept has been in the suggestion that there is a basic conflict between "an assumption of equality" in federal states and what is perceived, often, to be special privilege for one or more units. Yet, as Spain has demonstrated, special status for clearly identifiable and unique communities within a federal or federalising state in no manner leads to disintegration; Switzerland, of course, may also be [*597] cited in support of the concept of asymmetry. Clearly, component units of federal states normally are not equal either in terms of population or economic wealth and, it usually follows, that within federal states some form of fiscal redistribution of wealth occurs as acknowledgement of that diversity. In Canada some believe that we can redefine federal relationships as partnerships - if this is plausible, then there is some hope for complex federal relationships. 69 If engagement of the component unit governments in that redistributive process is a form of devolution, then I suppose we are in a bit of a devolution era. 70

An increased federal role may be necessary, but whether it is legally valid or politically viable is another matter. The validity of all the models depends on the scope of federal power. The Supreme Court has interpreted the Tenth Amendment's protection of states' rights to forbid the federal government from ordering states to pass laws or implement federal programs. 74 Consequently, the federal government could not simply mandate states and localities to run their educational systems in accordance with federal standards. So far the Court has not used the Tenth Amendment to limit the federal spending power. Thus, strings attached to federal money, as with most of the existing federal interventions into public education, is currently an available route. 75 Whether the Court would invoke [*406] the Tenth Amendment if the federal government tried to use the spending power to fully finance public education and prohibit state and local supplementation, to take over the states' role in superintending local school districts, or to totally federalize education and establish a federal public school system, is hard to say and likely depends on the ideological tilt of the Court at the time. The basis of a decision striking down federal intervention would likely be that public education is a traditional state function that the federal government may control to a limited degree but not so extensively as per the three models. 76 While such a decision is certainly conceivable, my view is that the extent of the federal role should be treated as a political question, on the ground that tradition should not stand in the way of progress in education and that the political process is the appropriate place to resolve whether an increased federal role would be progressive. 77 [FOOTNOTE 77 BEGINS] See, e.g., Erwin Chemerinsky, Protecting the Spending Power, 4 Chapman L. Rev. 89, 89 (2001) (arguing that "Congress's spending power should be broadly interpreted" and that "the Tenth Amendment should not be applied as a limit on the spending power or on Congress's ability to place conditions on its spending"); Aviam Soifer, Truisms that Never Will Be True: The Tenth Amendment and the Spending Power, 52 U. Colo. L. Rev. 793, 800 (1986) (arguing that "the Tenth Amendment provides no constitutionally enforceable barrier against congressional action"). But see Lynn A. Baker, The Spending Power and the Federalist Revival, 4 Chapman L. Rev. 195, 198 (2001) (arguing that "the modern Congress regularly uses fiscal redistribution among the states and conditional federal spending to impinge, intentionally or unintentionally, on the autonomy that the Framers sought to guarantee the states," that "these intrusions on state autonomy reduce aggregate social welfare," that "the states cannot protect themselves through the federal political process against Congress's exercise of its spending power," and that the Court should be willing to limit Congress's spending power in order to protect states' rights). [FOOTNOTE 77 ENDS]

The second land use puzzle is how to address the intrametropolitan inequalities resulting from the fragmented distribution of regulatory authority among multiple local jurisdictions without undercutting the beneficial effects of interjurisdictional competition. While this "local government boundary problem" extends beyond property law, 8 land use regulations are particularly problematic because they empower local jurisdictions to exclude unwanted residents by imposing what are, for all practical purposes, high entrance fees. Critics of metropolitan fragmentation generally offer one of two strategies for addressing interjurisdictional inequality: some propose new regional government structures that would supersede local government authority in problematic areas, including the authority to regulate land uses; 9 others advocate fiscal redistribution between rich and poor municipalities within a metropolitan area. 10 The difficulty with these strategies is that each threatens to undermine the efficiency gains that are produced when, as Charles Tiebout influentially predicted, 11 local governments compete for residents by structuring distinctive packages of taxation, regulation, and other publically provided amenities and services. 12 This competition for Tiebout's "consumer [*1908] voters" is hardly fine grained; it is also a primary generator of the very inequities lamented in the local-government literature. But it does subject local governments to some approximation of market competition, and regional-government and regional-redistribution proponents struggle to demonstrate that the benefits of regionalization outweigh the costs of limiting intermunicipal competition.

As noted in the opening discussion of these questions, Wechsler's approach has been criticized on the grounds that he overestimated Congress as a forum [*86] that fairly represents the divergent interests of different states. Commentators have argued that the courts ought to step in, at the behest of states, and at times invalidate congressional legislation because Congress is not a level playing field. 237 [FOOTNOTE 237 BEGINS] All three of the articles by Lynn Baker, supra notes 19 & 35, make this point. She argued, for example, that Congress "regularly uses fiscal redistribution among the states and conditional federal spending to impinge" on state autonomy and that states "cannot protect themselves through the federal political process against" various exercises of congressional power. Baker, Spending Power, supra note 35, at 198. [FOOTNOTE 237 ENDS] The argument is that population and wealth allocations across the country make the two-senators-per-state system democratically unfair. Further evidence comes from data that senators from different states bring vastly different amounts of money home to their constituents. 238

Intergovernmental fiscal redistribution means that several communities and the department can enter into intergovernmental fiscal relations with one another, and the regional budgets and departments can participate in redistribution programmes. Such programmes are accepted by the regional authorities and the authorities of the department without the participation of the state;

The formation of ERC’s claims of fiscal exploitation and their degree of credibility also depend on other factors than just the existence of a fiscal deficit with the central administration. While the ‘adequate’ level of social redistribution is a political question that does not concern us here, what can be discussed from a technical perspective is whether there are major flaws in the system that might nourish discontent with concrete forms of social redistribution. Ways of looking at this include the evaluation of: overcompensation effects, considerations of efficiency and regional economic convergence, trends in taxation and public finances, and the overall evolution of the economy. A minimal definition of fiscal redistribution entails that regions should contribute in accordance with their income but receive equal per capita spending. Hence, those with a higher than average income should be net contributors and those with a lower one net recipients. Uriel and Barberan (2007, p. 412) show that, in the period 1991–2005, Catalonia’s position was in line with this assumption. Yet, there also are some overcompensation effects,6 although their precise size is unclear. Using data for 2005, Espasa and Bosch (2010) argued that Catalonia received between 12 per cent and 14 per cent less than the Spanish average. Yet, De la Fuente (2005) calculated the same amount at 6 per cent below the average for the period 1990–97. Furthermore, this has affected other contributory regions and not exclusively Catalonia (Tortella 2016, pp. 441–443). What, instead, seems to be uncontroversial is the disproportionately low amount of infrastructural investment received by Catalonia. De la Fuente – who has otherwise provided very conservative estimates of the fiscal deficit (e.g. De la Fuente 2001) – has pointed out that the Generalitat received less investment than all other autonomous communities during the 1990s. Such spending represents a small share of the deficit claimed by ERC, but it probably had a sizable negative impact on the development of the Catalan economy in recent years.

Whether one agrees with it or not, this popular understanding of redistribution's purpose yields some useful criteria for assessing the degree to which our redistribution programs are actually succeeding. The aims of helping the poor and minimizing harm to everyone else, in other words, offer some specific ends against which our means of redistribution can be tested.

By and large, those means take three forms. First, there are direct anti-poverty programs, like Temporary Assistance to Needy Families (what we commonly think of as welfare), food stamps, Medicaid, and the Earned Income Tax Credit. Second, there is progressive taxation, which transfers wealth from richer to poorer Americans across the income distribution. And third, there are policies that tilt economic outcomes in specific markets to benefit people with lower incomes(minimum-wage laws are a classic example).

Limited fiscal and monetary expansion might be acceptable during crises when unemployment is high and output is low. In the United States, however, the economy is growing faster than expected and unemployment is below 4 per cent. A boost in federal spending would neither stimulate nor stabilize GDP. It would only divert labour and capital to the government’s hand-picked winners, as Steve Ambler from the C.D. Howe Institute points out. That is exactly what MMT proponents want and is why its most vocal supporters endorse the GND, Medicare for All, and other programs that require massive fiscal redistribution.

Term transfer payments Definition: Payments made without any corresponding production or expectations of production. Unless otherwise noted (such as business transfer payments), the term transfer payments generally refers to payments by the government sector to the household sector. The three most important transfer payments in our economy are for Social Security, unemployment compensation, and welfare. The intent of these transfers payments is to redistribute income, and thus the goods and services that can be had with the income. Transfer payments surface as income received but not earned (IRBNE) added to national income to derived personal income.

35. This paper relies on the Reynolds-Smolensky (1977) approach to quantify income redistribution achieved by taxes and transfers, following common practice in the literature.27 [FOOTNOTE 27 BEGINS] 27. See e.g. Immervoll et al. (2006); Immervoll and Richardson (2011). The voluminous political science literature on redistribution does not usually rely on this approach but on aggregate social spending and welfare measures. [FOOTNOTE 27 ENDS] “Redistribution” is meant as a reduction in household income inequality, i.e. taxes and transfers are said to “redistribute” if they reduce income inequality regardless of the extent to which this is achieved by actually transferring resources from higher-income households to lower-income households. Table 1 illustrates the underlying (linear and static) accounting framework: the left column presents the household income concepts and their components applied at the household level data, while the second and third columns contain the corresponding inequality measures allowing for deriving an aggregate redistribution measure at the country level. Income inequality is quantified by the Gini coefficient, implying that the redistributive effect of taxes and transfers is defined as the difference between the Gini coefficient of household market incomes and the Gini coefficient of household disposable incomes. Unless otherwise stated in the paper, this is measured in relative terms, that is, in per cent of the market income Gini coefficient. This normalisation allows for taking into account cross-country differences in the initial level of market income inequality. The respective redistributive effect of the various instruments of the tax and transfer system, e.g. cash transfers and personal income taxes, is assessed analogously based on the same accounting framework (see Box 4).