Fiscal redistribution includes targeting---doesn’t require universality.

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.

The format of the paper is as follows. Section II defines what we mean by universal and targeted transfers; this is important since much of the debate is confounded by the very loose and inconsistent use of these concepts. Section III focuses on the benefits of targeting and defines key targeting concepts. Section IV discusses the trade-offs that need to be addressed when designing fiscal redistribution in the presence of incentive (or efficiency) costs. Section V expands the discussion to incorporate administrative, social, and political costs, which can introduce additional equity-efficiency trade-offs. Section VI presents a brief discussion of policy options for strengthening fiscal redistribution in advanced and developing countries, including through expanding transfer coverage4 and progressive tax financing. Section VII concludes.

II. TARGETED AND UNIVERSAL TRANSFERS

The distinction between targeted and universal transfers relates to the former’s use of eligibility conditions (or “targeting” criteria) for receiving benefits. It is useful to distinguish between the following concepts:

 Universal transfers. These are transfers that are available to everyone without any eligibility conditions (i.e., no targeting). For example, a Universal Basic Income (UBI) is typically defined as a uniform cash transfer, set at a level that covers basic needs, that every person is entitled program under which every person gets a common (or uniform) transfer, not necessarily set to cover basic needs, is also an unconditional universal transfer.

 Quasi-universal transfers. These are “categorical” transfers where eligibility is defined according to criteria that are typically viewed as being highly (although not perfectly) correlated with having low income.6 All households in a given “category” would receive a transfer regardless of income. For instance, households with children or elderly may be deemed more likely to be poor. Therefore, basing (“targeting”) eligibility for transfers on such criteria will result in poor households receiving a relatively high share of total transfers and thus have a bigger poverty impact compared to a universal transfer with the same transfer budget.

 Means-tested transfers. These are benefits where eligibility is based on income (or “means”). This requires a capacity to define, measure and verify “means”. For instance, General Minimum Income (GMI) programs will typically base “means” on total household income and assets. The benefit for a household is then based on the gap between “means” and “needs”, where the latter reflects family composition and some concept of basic needs, and the transfer partially or fully closes this gap.

In practice, safety net programs can use a combination of targeting criteria (Annex 1). For example, child benefits for children of lower age groups may be universal while for some older children may be means tested. Similarly, social pensions for the elderly can be means tested. Or universal child benefits and social pensions can be complemented by a means-tested GMI-type program. Any evaluation of social safety net systems therefore needs to address the whole range of programs being used. Note also that, in practice, all transfer programs outside of a universal transfer typically involve some sort of targeting, so that targeting is typically the norm rather than the exception.