IMF highlights need to combat inequality
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.