IMF high­lights need to com­bat in­equal­ity

The Daily News Egypt - - Business -

DW—The lat­est In­ter­na­tional Mone­tary Fund’s Fis­cal Mon­i­tor re­port has fo­cused on in­equal­ity and ways of re­duc­ing both its causes and ef­fects. Among sev­eral fas­ci­nat­ing ideas it dis­cusses, univer­sal ba­sic in­come stands out.

Al­though in­creased global in­te­gra­tion and tech­no­log­i­cal progress have gen­er­ated eco­nomic growth and fall­ing global in­equal­ity and poverty, ris­ing in­equal­ity in ad­vanced economies ,in con­junc­tion with job in­se­cu­rity and stag­nat­ing real in­comes for a seg­ment of the pop­u­la­tion, have led to grow­ing pub­lic back­lash against glob­al­iza­tion — that is the ver­dict of the IMF in its lat­est Fis­cal Mon­i­tor re­port.

The new re­port fo­cuses on how fis­cal pol­icy can help gov­ern­ments ad­dress high in­equal­ity while min­i­miz­ing po­ten­tial trade-offs be­tween ef­fi­ciency and equity.

“While some in­equal­ity is in­evitable in a market-based eco­nomic sys­tem as a re­sult of dif­fer­ences in tal­ent, ef­fort and luck, ex­ces­sive in­equal­ity could erode so­cial co­he­sion, lead to po­lit­i­cal po­lar­iza­tion, and ul­ti­mately, lower eco­nomic growth. But when is in­equal­ity ex­ces­sive?” the re­port asks.

In ad­vanced economies, di­rect taxes and trans­fers re­duce in­come in­equal­ity on av­er­age by about one-third, with three-quar­ters of this re­duc­tion achieved through trans­fers, it states.

In de­vel­op­ing economies, fis­cal re­dis­tri­bu­tion is much more lim­ited, re­flect­ing lower and less pro­gres­sive tax­a­tion and spend­ing and greater re­liance on re­gres­sive in­di­rect taxes.

Taxes and death: life’s only cer­tain­ties

The re­port notes that pro­gres­sive tax­a­tion and trans­fers are key com­po­nents of ef­fi­cient fis­cal re­dis­tri­bu­tion. “At the top of the in­come dis­tri­bu­tion, mar­ginal in­come tax rates that in­crease with in­come lev­els can achieve greater pro­gres­siv­ity,” adding that while var­i­ous in­stru­ments can en­hance pro­gres­siv­ity at the bot­tom of the in­come dis­tri­bu­tion.

Ad­vanced economies with rel­a­tively low lev­els of pro­gres­siv­ity in their per­sonal in­come tax (PIT) may have scope for rais­ing the top mar­ginal tax rates with­out ham­per­ing eco­nomic growth, the re­port notes.

“Dif­fer­ent types of wealth taxes can also be con­sid­ered. Emerg­ing mar­kets and low in­come de­vel­op­ing coun­tries should fo­cus on grad­u­ally ex­pand­ing the cov­er­age of the PIT and rais­ing in­di­rect taxes — in­clud­ing ex­cise taxes on lux­ury goods and con­sump­tion items that gen­er­ate neg­a­tive ex­ter­nal­i­ties, such as fos­sil-fuel-based en­ergy, al­co­hol, and to­bacco — to gen­er­ate fund­ing for pro­gres­sive spend­ing.”

Mean­while, cap­i­tal in­come is dis­trib­uted more un­equally than la­bor in­come and its share in to­tal in­come has risen over re­cent decades, the re­port notes, adding that it is also of­ten taxed at a lower (and de­clin­ing) rate.

Univer­sal ba­sic in­come

The idea of a univer­sal ba­sic in­come (UBI) has re­ceived grow­ing at­ten­tion in aca­demic, pol­icy, and pub­lic dis­course, and sev­eral coun­tries are ex­per­i­ment­ing with dif­fer­ent forms.

While some coun­tries al­ready have some com­po­nents of a UBI in place (such as univer­sal child ben­e­fits and so­cial pen­sions), no coun­try has yet adopted a UBI that cov­ers its en­tire pop­u­la­tion.

Pro­po­nents ar­gue that a UBI can ad­dress poverty and in­equal­ity more ef­fec­tively than means-tested pro­grams in the pres­ence of in­for­ma­tion con­straints, high ad­min­is­tra­tive costs, and other ob­sta­cles (in­clud­ing so­cial stigma) that limit the take-up of ben­e­fits.

Op­po­nents high­light that uni­ver­sal­ity im­plies an un­nec­es­sary leak­age of ben­e­fits to higher-in­come groups and a de­cline in la­bor force par­tic­i­pa­tion.

In de­vel­op­ing economies, adop­tion of a UBI may be an op­tion for gov­ern­ments wish­ing to strengthen their safety nets in the short term, the IMF ar­gues.

“How­ever, to be ef­fec­tive and pre­serve fis­cal sus­tain­abil­ity, such an ex­pan­sion would need to be fi­nanced through ef­fi­cient and eq­ui­table in­creases in taxes or cuts in spend­ing, such as elim­i­nat­ing univer­sal price sub­si­dies or broad­en­ing the con­sump­tion tax base, in­clud­ing through taxes on con­sump­tion with neg­a­tive ex­ter­nal­i­ties.”

The fis­cal cost of a UBI would de­pend on the level at which it is set. If it were set at 25 per­cent of me­dian per capita in­come, the fis­cal cost would be about 6-7 per­cent of GDP in ad­vanced economies and 3-4 per­cent in emerg­ing mar­kets and de­vel­op­ing economies, the re­port notes.

Get­ting down to the ba­sics

In­vest­ments in ed­u­ca­tion and health can help re­duce in­come in­equal­ity over the medium term, ad­dress the per­sis­tence of poverty across gen­er­a­tions, en­hance so­cial mo­bil­ity, and ul­ti­mately pro­mote sus­tained in­clu­sive growth, the re­port states.

Yet de­spite progress over the past decades, ed­u­ca­tion en­roll­ment gaps re­main for cer­tain groups in the pop­u­la­tion in many coun­tries.

“So­cioe­co­nomic sta­tus is still a main de­ter­mi­nant of ac­cess to ed­u­ca­tion, es­pe­cially in emerg­ing market and de­vel­op­ing economies. Siz­able gaps among so­cioe­co­nomic groups in at­tend­ing early child­hood, sec­ondary, and ter­tiary ed­u­ca­tion re­main in al­most the en­tire de­vel­op­ing world.

Pri­mary ed­u­ca­tion gaps have mostly nar­rowed, but chil­dren from fam­i­lies with a dis­ad­van­taged so­cioe­co­nomic sta­tus con­tinue to suf­fer from low ac­cess in sub-Sa­ha­ranAfrica and the Mid­dle East and North Africa, and to a lesser ex­tent in emerg­ing and de­vel­op­ing Asia and in Latin Amer­ica and the Caribbean.

Look­ing after the weak­est

In ad­vanced economies, the gap in life ex­pectancy be­tween males with ter­tiary ed­u­ca­tion and those with sec­ondary ed­u­ca­tion or less ranges from about four to 14 years and has even widened in some coun­tries.

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