Taxation, Inequality and Fiscal Contracting in the Americas

Abstract

Since 2000, Latin America has become less unequal, with lower levels of poverty, and likely greater economic mobility. Over a longer time period, the story in the United States is much different. The United States has become more unequal, with relatively high poverty levels, and likely less economic mobility. While these changes largely result from broader economic and political factors, government fiscal policies play some role in changing market outcomes. This Article examines how changes in levels of inequality may influence taxing and spending policies.

It suggests that in both parts of the Americas changing economic and political realities may contribute to a changing 'fiscal contract.' One contributing factor is the economic circumstances of the middle class. In Latin America, improvements in the economic status of the middle class may call for different tax and spending policies. In the United States, the increased economic vulnerability of the middle class and the perceived decline in economic mobility may drive change. In both regions, the extent and nature of change may depend largely on the extent to which the middle class come to think that they may be better served with higher (or lower) taxes (on them, and on the wealthy) and more (or less) robust social spending programs.

Keywords: Fiscal redistribution, taxation, inequality, fiscal contract, Latin America, United States

JEL Classification: D31, H11, H23, O54, P52