What are governments doing on inequality? Great new cross-country data (and some important conclusions) from Nora Lustig

January 28, 2015

     By Duncan Green     

Oxfam and Oxford University held a big inequality conference last week, timed to coincide with Davos and the launch of our new pre Davosinequality brazilbriefing (massive media coverage – kudos to author Deborah Hardoon and Oxfam press team).

I generally find conferences pretty disturbing. This one at least spared us the coma-inducing panels of nervous researchers reading out their papers. All the speakers were confident and convincing.

The meta-messaging at this one was great – major figures from the worlds of politics, business and academia stressing the importance of the issue and the need for action. Get this from Lady Lynn Forester de Rothschild (who started by apologising for her name – ‘I love my husband, but…..’): ‘Charlatan financiers, clueless regulators, pensioners losing their savings, CEO wages 200 times the average. Clearly things had gone wrong by the time of the 2008 crisis – collusive capitalism, big business and government colluding for their own interests is simply appalling.’

The anecdotes were pretty good too, especially on the ‘race to the bottom’ on tax incentives:

Donald Kaberuka (sadly, nearing the end of his term as President of the African Development Bank) on the experience of being Rwanda’s finance minister:

‘The multinational comes to you and says we want to invest in your country, but we need a 5 year tax holiday and this long list of requirements. And by the way, we only have 6 hours, and then our plane is taking us to your neighbour, who will probably agree to all of our demands.’

Another former Foreign Minister, Guatemala’s Juan Alberto Fuentes, had the same experience, as Costa Rica pulled the rug out from under a Central American agreement in order to do a deal with Intel.


But where was the data? Just as my powerpoint craving was getting serious, Nora Lustig rode to my rescue with a great presentation of the findings from the ‘Commitment to Equity’ research programme, which she directs. The project is ‘designed to analyze the impact of taxation and social spending on inequality and poverty in individual countries, and provide a roadmap for governments, multilateral institutions, and nongovernmental organizations in their efforts to build more equitable societies.’

Some of the more striking findings from her talk:

Cash transfers reduce inequality and do so quite substantially in some countries, e.g. South Africa, Chile, and Brazil. Direct taxes tend to be equalizing but their impact is relatively small.

Net indirect taxes (e.g., VAT, but also including energy and food subsidies and VAT exemptions) cut both ways: they increase inequality compared to


pre-tax disposable income inequality in some countries (notably, Bolivia and Guatemala) but reduce it in others (among them, Mexico and Ethiopia). See bar chart.

So much for inequality – what about poverty? Reassuringly, Nora finds that Direct Transfers (including direct taxes) reduce poverty (see the second bar chart). But the picture is more mixed with Indirect Taxes, which actually increase poverty in several countries.

I got a bit bogged down with the detail here, so tried out an impromptu executive summary with her in Q&A. We subsequently agreed via email on:

‘If governments care about inequality, they should take a holistic approach: don’t just look at individual interventions like personal income taxes or cash
transfers, and look at what tax and benefits systems do to equity both in terms of people’s cash stance (eg, cash transfers and subsidies minus direct and indirect taxes) and access to free or subsidised health and education. The best way to reduce inequality is generally to spend lots on cash transfers, health and education. Be careful with the design of indirect taxes like VAT, and worry about Poverty as well as Inequality, because sometimes, even inequality-reducing taxes can worsen poverty.’

Clear as mud?