It’s taxes AND transfers.

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.