Can a Poverty-Reducing and Progressive Tax and Transfer System Hurt the Poor?

37 Pages Posted: 27 Jun 2015

Date Written: May 21, 2015

Abstract

Whether the poor are helped or hurt by taxes and transfers is generally determined by comparing income distributions before and after fiscal policy using stochastic dominance tests and measures of progressivity and horizontal inequity. We formally show that these tools can fail to capture an important aspect: that a substantial proportion of the poor are made poorer (or non-poor made poor) by the tax and transfer system. We call this fiscal impoverishment, and axiomatically derive a measure of its extent. An analogous measure of fiscal gains of the poor is also derived, and we show that changes in the poverty gap can be decomposed into our axiomatic measures of fiscal impoverishment and gains. We also establish dominance criteria for unambiguous comparisons of fiscal impoverishment and gains under the current system to that under a proposed reform, for a range of possible poverty lines. We illustrate using Brazilian data.

Keywords: taxes, poverty, inequality, Brazil

JEL Classification: H2, I32

Suggested Citation

Higgins, Sean and Lustig, Nora Claudia, Can a Poverty-Reducing and Progressive Tax and Transfer System Hurt the Poor? (May 21, 2015). Center for Global Development Working Paper No. 405, Available at SSRN: https://ssrn.com/abstract=2623141 or http://dx.doi.org/10.2139/ssrn.2623141

Sean Higgins (Contact Author)

Tulane University ( email )

6823 St Charles Ave
New Orleans, LA 70118
United States

Nora Claudia Lustig

Tulane University ( email )

6823 St Charles Ave
New Orleans, LA 70118
United States

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