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The figures described in this chapter update and extend our “Fiscal Redistribution Dataset,” which has provided data on a number of aspects of inequality reduction in developed countries by way of taxes and social transfers. The dataset was first compiled from LIS microdata in 2005. 4 In 2008, it was updated to reflect changes in LIS methodology and to include several newly available income surveys. 5 Some of our measures were further extended and updated in 2011 in a separate effort by Caminada and Wang.6 Our revised dataset, as well as that of Caminada and Wang, are available on the LIS website and have been widely used by researchers interested in income inequality and government redistribution.

The purpose of this chapter is to describe the results of a thorough update of our data on fiscal redistribution that we have recently undertaken, an update in which we have not only added new figures but also recalculated earlier ones to reflect recent changes in LIS methodology. For a number of reasons, we believe that this is a good time to update our dataset “from the ground up.” First, in mid-2011 the LIS implemented a new data template that made a number of changes in traditional LIS variables. One important revision was a new definition of post-government income, which is now called “disposable household income” (DHI). The main change is that most non-cash income (but not imputed rent) is now included in market income. This matters most for developing countries, but it also has some effect on the developed countries that are our focus. Since this new DHI income concept has become the basis for the LIS’s widely used “Key Figures7 ,” we believed that it was important for us to employ it as well.

1 The Theory of Fiscal Redistribution: Key Analytical Insights

In this Handbook, “fiscal redistribution” refers to the process by which the state collects revenues from individuals and households(primarily through taxes) and spends these revenues on benefits (for example, cash transfers, price subsidies, and in-kind benefits such as education and health) intended for specific individuals and households. In so doing, the state changes the postfiscal income distribution and poverty rates that would have prevailed in the absence of fiscal policy. Because of behavioral responses and general equilibrium effects, fiscal policy can also change the prefiscal income distribution and poverty rates. While at this point the CEQ Assessments do not estimate the counterfactual prefiscal income with these second-round effects in place, it is important to note that the analytical insights presented here and in chapters 2 (Enami, Lustig, and Aranda), 3 (Enami), 4 (Higgins and Lustig), and 5 (Enami) apply to fiscally included income redistribution regardless of the method used to estimate its extent. That is, regardless of whether fiscal redistribution is calculated using run-of-the-mill fiscal incidence analysis, microsimulation methods, or partial or general equilibrium modeling, the theoretical results discussed below and in the next four chapters apply.

There are several items in the paper that could benefit from some additional discussion. First, as noted in the paper, the present work is rather closely linked to a longstanding literature on the effective progressivity (or redistribution) of fiscal policy. The use of measures based on the Gini coefficient dates back at least to Musgrave and Thin (1948), while the intuitive measure frequently used – the market Gini minus the post-fiscal Gini – is attributed to Reynolds and Smolensky (1977). There are many analyses that use this index to measure redistribution, the most recent of which is IMF (2014) as cited by the authors. It would be quite useful to better understand the benefits and costs of regressing the post-fiscal Gini on the market Gini (as the authors do) instead of examining their difference (as is more commonly done). The latter approach is indeed intuitive and as noted in IMF (2014) there is a significant body of analysis available – much of which parallels and augments the key results of this paper. The authors emphasize that using the difference in Ginis in regression equations (say, by regressing the Reynolds–Smolinski measure on various fiscal policies) will effectively restrict the coefficient on the market Gini to be 1. While this may be true, it is not entirely clear why the restriction represents a significant cost, given the added intuition from using a measure of fiscal redistribution and, indeed, given the authors own empirical findings of a coefficient quite close to 1. 5

One last word about coverage. One cannot disagree with the attempt made by NCEUS to extend social security to such of those workers in the organised sector who do not have any social security cover. These would include contract labour, casual labour, and what not whose numbers are on the increase consequent on globalisation, liberalisation and privatisation. However, the need will arise for defining the term "social security" and this is not an easy matter. Do we interpret the term to mean only the benefits included in the National Social Security Scheme or will it be interpreted more widely or more narrowly. This may call for clarification.

At a recent two-day consultation in New Delhi on July 10 and 11, organised by the NCL, the Bill was discussed. At the end of the consultation, unanimous conclu- sions were reached. I am broadly in agree- ment with these. Let us not dismiss them as the best being the enemy of good. Let us not also raise the futile question as to who will pay for all this. The answer is that we as a nation will pay for these and more in the coming years; otherwise the term "social" in social security has no merit or significance. As NCCUSW said in its petition to Parliament, after the rally in New Delhi in May 2005, "we are not a burden on society, for we happen to be society itself given our large numbers and the larger numbers of our dependents".

While no effort should be spared in persuading lawyers to give a portion of their time to servicing the indigent 108, in part, to make them all aware of the realities of working for the less fortunate, redistribution through taxation is probably a more effective tool. In any event, it is not possible to imagine that the system of justice can be made more accessible merely through changing procedure and forums. A major element of fiscal redistribution is essential.

Much of what we identify as fiscal redistribution in our study cannot in fact be spent by households. Instead, the phrase “fiscal redistribution” is simply used to represent an inequality between a household’s tax burden and the amount government spent on them in return. It is important to be cautious when interpreting the figures from our study as representing pure redistribution of income. Our study only measures the more limited phenomenon of a household being supplied with more government spending than it pays in taxes. It does not measure actual changes in the distribution of income due to government fiscal policy.

Although there is no single reason for the persistence of economic injustice in the world, a primary factor is tax and fiscal policy. 8 [FOOTNOTE 8 BEGINS] See THOMAS PIKETTY, THE ECONOMICS OF INEQUALITY 100 (Arthur Goldhammer trans., 2015) ("The primary tool for pure redistribution is fiscal redistribution, which makes it possible to correct inequality due to unequal initial endowments and market forces while preserving as much as possible of the allocative role of the price system."). [FOOTNOTE 8 ENDS] Yet, notwithstanding the political centrality of fiscal policy and economic justice, deep disagreement about taxes persists around the world. Discourse about taxes continues to produce disappointing economic policies that do not improve economic fairness or happiness. 9

It is important to emphasize that the mechanism underlying our hypothesis is market adjustment, not fiscal redistribution. Although, in PRT’s model, the separation of powers also affects redistribution, it is not clear whether these redistributive effects should raise or lower inequality. If the minority that benefits from redistribution is poor, then separation of powers, which reduces redistributive transfers, will increase inequality. However, if this minority is wealthy, then separation of powers and the resulting fall in transfers will reduce inequality. Because we do not know who the transfer beneficiaries are, the impact of separation of powers on inequality via transfer spending is theoretically ambiguous. We thus concentrate on the public-good implications of PRT’s model. For this reason, our empirical analysis examines the relationship between budgetary institutions and pre-tax-and-transfer incomes. Because such incomes do not incorporate fiscal transfers, any relationship between institutions and incomes is likely to reflect the former’s public-good rather than redistributional effects.

Throughout, we use the term redistribution applied to tax and benefits systems to signify inequality reducing policies, which is achieved when the relative position of individuals at the bottom of the earned income distribution is improved by the tax and benefits system. Thus, for example, a pure flat tax rate would not be redistributive; instead, it is the progressivity of the tax system that makes it redistributive. A progressive tax system is one where the average tax rate (ATR) is increasing in earned equivalised income, where the ATR is the ratio of total family tax liability (net of benefits) to earned income.

For the most part, advanced countries already have strong fiscal redistribution systems, as reflected in relatively high levels of taxes and transfers. The existing set of tools at their disposal means that these countries can closely approximate the optimal income tax schedule discussed above through a combination of means-tested social assistance transfers (high MTRs at the bottom), consumption taxes (flat tax in the middle), and progressive income taxes (increasing MTRs at the top). In many countries these are complemented by categorical transfers including child benefits and social pensions, as well as comprehensive social insurance systems. However, there are some areas where these systems could be further strengthened (IMF, 2017):

 Personal income taxation (PIT): There appears to be room in many advanced countries for increasing the progressivity of income taxes, which has fallen in many countries since the 1980s.22 Top marginal PIT rates have declined significantly since 1980. The progressivity of income taxes is often even lower than suggested by statutory rates due to the proliferation of tax exemptions which can be more easily exploited by high-income individuals through aggressive tax planning (Alstadsaeter, Johannesen, and Zucman, 2018). Recent empirical studies suggest that in many countries progressivity could be enhanced without adversely affecting economic growth (Gerber et al., 2018). In the context of increasing income volatility and income uncertainty driven by rapid technological change, more progressive income tax systems will also strengthen the insurance role played by fiscal redistribution.

(c) The Tribunal's Conclusion That the Relevant Measures Fall Within Article 4 330. The positions of the Parties as presented by the Parties during the course of the arbitration indicate that the tax and royalty measures constitute a "fiscal regime". That understanding of the opening phrase in Article 4 is supported by the first meaning of "fiscal" in the Oxford English Dictionary:

"of or pertaining to the fisc or treasury of a State or Prince; pertaining to the public revenue".

The fourth and fifth regressions in Table 7.1 examine the use the size of public expenditures as a proxy for the main redistribution tools, namely for direct taxation and transfer payments. In these regressions we simply use these variables or similar ones instead of total public expenditures. We find that both variables have a negative effect on inequality, namely that they redistribute income. But the effect of direct taxation is significant, while the effect of social benefits is statistically insignificant. Furthermore, adding social benefits to direct taxation reduces R2, namely the explanatory power of the regression is reduced. This is unsurprising since the variable we use is a small part of transfers, namely unemployment benefits. We conclude, therefore, that the redistributive effect can be assessed much better by use of progressive direct taxation than by social benefits and social subsidies. Below we find that this result is reversed when we focus on the rate of poverty. Note that the absolute effect of direct taxation has a stronger effect on inequality than total expenditures, but this result is unsurprising. Any marginal unit of public spending is only partially financed by direct taxes, while the rest is financed by indirect taxes. Hence direct taxes fluctuate by less than public spending, so their measured effect on inequality should be higher. Overall, regressions (4) and (5) have lower R2, so their explanatory power is lower than that of total public spending. From here on, public spending will be our main measure of the redistribution of income from market to disposable incomes. As a result regression model (4) remains our central and basic regression model.

Following OECD rules, the 1983 Nordic multilateral treaty ensured that employees’ income would only be taxed by the country of employment. An additional bilateral protocol between Sweden and Denmark included a mechanism for compensating both countries for the loss of tax revenue from residents who commute across the border. However, the substance of this agreement is controversial in Sweden. At a national level, it has been argued that the resources transferred are insufficient. Within Sweden, the system of fiscal redistribution means that the affected region, Skåne, does not benefit from the transferred funds in spite of shouldering the responsibility to provide extensive public services for residents paying income taxes across the border.

Income inequality is measured here by the Gini coefficient, although of course inequality has many other dimensions. 17 The term “redistribution” is used to mean a reduction in income inequality as measured by the Gini coefficients as the result of government policies controlling for other factors that typically have been identified in the past literature as significant determinants of income distribution. On the side of government policies we consider all direct and indirect taxes, 18 as well as a variety of government expenditures beyond social welfare expenditures.19 We take a long run view of how tax and expenditure policies may have affected income distribution over a continuum of 30 + years. . Using a multi-country study can be criticized because even though income distribution is affected by a set of common factors across countries, there are many institutions and processes that are particular to each country that cannot be reflected in the variables used in the regression. However, this issue is minimized because in our estimation technique we control for those fixed country effects.

The study deals with public preferences concerning redistribution policy, and their effect on actual policy. Redistribution is defined in the literature as a reduction of inequalities in the distribution of wealth through government taxes and transfers (Durante & Putterman, 2009). There is a mismatch between public preferences and policy in this field in certain countries. That is, in some countries the public displays a high demand for redistribution policy, but the government's social spending is low or vice versa.

Fiscal taxation for economic growth, implemented by tax neutrality as a guiding principle, has since the beginning of the 1980s, become a dominant view on tax sustainability. Fiscal is defined as efficiency in relation to optimal tax theory, which basically is to avoid distorting tax regulations that are regarded to cause unwanted excess burdens in the economy. This has been described as an ideological hegemony, which on a global scale has institutionalized a one-path model for taxing for economic growth in tax law design.8 The main features of these tax reforms can briefly be summarized as follows:

• Broader labour income tax bases but low progressivity;

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.

Finally, even if redistribution can be done more effectively and efficiently through direct fiscal means, and even if its overall goals are determined in the aggregate on the basis of some external principles of equity, one would still need to know how various legal rules and policies affect the different groups. Knowledge of their distributive effects is important so that the income tax system can be calibrated to achieve the desired level of redistribution and to correct for disproportionate benefits that some subgroups obtain elsewhere. Access justice is assumed to be egalitarian and even progressive, a substitute to direct fiscal redistribution, thus necessitating less, not more, corrective progressive taxation. But if the regressive effects were prevalent, the opposite would be true: redistributive taxes would be all the more necessary. In short, society cannot achieve its desired overall level of redistribution if it miscounts the effects of some access justice programs.

In exploring these traditions empirically, we will introduce six variables, two representing each of the three explanatory traditions. Perhaps the most commonly addressed question from a power resources perspective is whether the partisan orientation of national governments is an important determinant of the extent of fiscal redistribution. Despite several decades of intensive work on this topic, the verdict is still in doubt. While a number of empirical studies have found support for the importance of partisanship, others have found little or no relationship. One reason for this lack of consensus may be that in nearly all of the empirical work on the topic the dependent variable is not fiscal redistribution per se but rather the size of social benefit programs relative to the economy. In measuring the partisan orientation of national governments, we employ a measure of “cabinet balance” (from Armingeon et al., 2004) that classifies national cabinets in a given year on a 5-point scale ranging from hegemony of right-wing parties (1) to hegemony of left wing parties (5).

However, this unprecedented change did not happen in the context of democratization.27 The reforms towards lower “institutionalized” inequality were famously led by (mostly left-wing) populist “strongman” (e.g. Peron in Argentina, Vargas in Brazil, Cardenas in Mexico, Ibañez del Campo in Chile, among many others), hegemonic parties (e.g., the Institutional Revolutionary Party which controlled politics in Mexico since the 1930s or the Justicialist Party in Argentina),28 de facto revolutions such as in Cuba or Bolivia in the 1950s,29 and military regimes.30 Interestingly, the long list of “strongmen” that marked the 20th century in Latin America, besides their disregard for legitimate democratic processes and efforts to erode checks and balances, all have in common a focus on improving the condition of poorer households through economic interventions (namely regulatory, social and industrial policy), not fiscal redistribution.

These non-fiscal interventions include, besides industrial policy, expropriations, red tape, macroeconomic policy to capture private rents (e.g., price-fixing and multiple exchange rates), and many other non-fiscal measures to favour workers over an elite of commodity-exporters, e.g., see Sachs (1989), Kaufman and Stallings (1991) and Edwards (2010). In line with our thesis, it seems that tackling inequality via fiscal redistribution necessitates the formation of a fiscal and political contract (the credible commitments) which are unlikely to form under non-democratic conditions -and less so under populist leaders who build support by polarizing society. Therefore, despite their strong pro-state and anti-elite rhetoric, Latin American strongmen proved powerless in building fiscal capacity and tackling regressive fiscal systems benefiting the elite.