But new data on taxation and spending in the world’s poorest countries suggests that progressive tax-and-transfer systems are far less common than you would think. In general, taxes are less progressive in those countries, financial transfers are much smaller, and the bulk of social spending is soaked up by broken health and education systems. The net effect is often that tax-and-transfer policies leave poor people worse off, not better. [...]
That happens in two ways: The income of the well-off is reduced by higher taxes (this accounts for about a quarter of the reduction in inequality) while the poor get payments like Social Security as well as family, housing, disability and unemployment benefits. The latter accounts for three-quarters of the reduction in inequality. The US is an outlier in seeing less redistribution than most rich countries, but even there, the net impact of taxes and transfers is to reduce inequality. [...]
The Gini coefficient measures the level of inequality in a group: A measure of 0 implies complete equality (everyone gets the same income) and 100 is perfect inequality (one person gets all of the income). Before government taxes and transfers, the Gini for the 29 developing countries in Lustig’s study is 47. (It stands at 45 in the United States). Fiscal redistribution reduces the Gini coefficient by more than 7 points in the US and European Union. [...]
In the rich world, the poorest citizens tend to be net financial recipients from the government — they get more in transfers than they pay in taxes. But that’s not true in some developing countries. First, tax regimes in those countries aren’t very progressive, partly because the revenue authorities tend to rely on indirect taxes like the value-added tax (VAT) — which fall on all consumers — rather than direct taxes on high personal or corporate incomes. (A VAT is similar to an American sales tax but applies to all firms, not just retail businesses.)
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