Abstract
Every discussion on income distribution and inequality distinguishes between market income, namely income before tax and without transfers, and disposable, or net income, which is after tax and including transfers. Hence, taxation and transfers create a redistribution of income. This redistribution is usually progressive, as direct taxes and subsidies are progressive, and thus it is supposed to reduce inequality, in the transition from market income to disposable income. This paper focuses on measuring the effect of fiscal policy in income redistribution and in reducing inequality. It also examines which type of fiscal policy is most strongly related to the redistribution of income, are they transfer payments? Is it direct taxation? Or is it the overall measure of fiscal policy, namely public expenditures, which are also known as the size of the public sector?
We are grateful to Kaushik Basu, who supported our work on this paper throughout the whole process. The comments of James Foster helped us significantly. Sharon Hadad first introduced us to the correlation between public expenditure and inequality, which spurred our interest in the topic. We received excellent comments from Paola Giuliano, Giuseppe Ragusa, Domenico Giannone and many more. Remaining errors are, of course, all us.
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Battisti, M., Zeira, J. (2016). The Effects of Fiscal Redistribution. In: Basu, K., Stiglitz, J.E. (eds) Inequality and Growth: Patterns and Policy. International Economic Association Series. Palgrave Macmillan, London. https://doi.org/10.1057/9781137554543_7
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DOI: https://doi.org/10.1057/9781137554543_7
Publisher Name: Palgrave Macmillan, London
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