Fiscal Policy, Income Redistribution, and Poverty Reduction in Latin America
- Our analysis of fiscal redistribution utilizes data housed in the CEQ Data Center on Fiscal Redistribution for 18 Latin American and Caribbean (LAC) countries and 40 non-LAC countries, making it one of the most complete and globally comparable studies to date.
- The LAC region is highly heterogeneous both in prefiscal income inequality and poverty and in the impact of fiscal systems on reducing income inequality and poverty.
- While LAC fiscal systems consistently reduce income inequality, they do not necessarily reduce poverty. In fact, in nine out of the 18 LAC countries, fiscal policies increase poverty, primarily due to consumption taxes on basic goods.
- Direct taxes and cash transfers are, as expected, progressive (equalizing) in all countries. So is spending on education and health. Contrary to perceptions, because poor households often buy their stuff in informal markets, indirect taxes are progressive in several countries. Another surprising result is that indirect subsidies are progressive in several cases as well.
- Based on our sample for LAC, more spending is associated with more redistribution. However, contrary to what one would like to observe in such an unequal region, more prefiscal inequality is not associated with a larger share of fiscal resources devoted to redistribution or a larger redistributive effect.
