Essays on Fiscal Policies and Income Redistribution

Abstract

The increasing rate of income inequality across the globe has generated a growing public support for income redistribution. Most governments usually employ fiscal policies as the main instruments to redistribute income. Despite the recognition that fiscal policies play a central role in addressing income inequality, empirical studies on this subject is very limited. The thesis addressed three main issues: the first study conducts an ex-ante evaluation analysis on the redistributive impact of a hypothetical child support grant financed with domestic tax revenues; the second study examines the determinants of income redistribution and the third study investigates the impact of cash transfers on the intra-household labour market decisions of beneficiaries. The first objective of the thesis seeks to examine the redistributive impact of a hypothetical child support grant financed with direct tax revenues. The Ghana tax-benefit microsimulation model (GHAMOD) was used to perform all the simulations. The magnitude of redistribution was derived by measuring the change in the inequality measure before and after taxes or transfers. In assessing the progressivity of the transfer, the study employed both concentration curves and concentration indices. Since the pursuit of equality in income distribution also involves poverty reduction, the study also examined the impact of this policy on poverty rate. Three policy scenarios were examined: a targeted child support grant; a universal child support grant with flat benefits and lastly, a universal child support grant with differentiated benefits. The following conclusions were drawn based on the simulations: a universal child support grant with differentiated benefits was the most effective child benefit scheme to reduce inequality and poverty even though it the costliest scheme. Generally, the results showed a trade-off between the fiscal cost and the extent of inequality reduction. The results also confirmed that the extent of redistribution does not only depend on the extent of progressivity of the cash transfer but also depends on the size or the magnitude of the transfer. Again, the simulations for the income tax reform indicated that increasing the tax rate for the top income bracket provides an avenue of raising revenue to fund the proposed programme and also ensures that the ultimate goal of income redistribution is achieved. The second research objective seeks to examine the factors that influence the extent of redistribution that can be achieved with a given set of taxes and benefits policies. It first tested the validity of the median voter theorem since many empirical studies have produced inconsistent results. Secondly, the study accounted for other factors that have the potential of affecting the impact of redistributive policies. The econometric technique used for the analysis was the system GMM. The outcome of the study confirmed the validity of Meltzer-Richard median voter hypothesis. Furthermore, the extended baseline regression models shown that, a country’s income level, fertility rate and trade openness positively affect the extent of redistribution. The degree of democratisation, on the other hand, negatively affect redistribution. Lastly, the third research objective evaluates the impact of cash transfers on intra-household labour market decisions of beneficiaries using the Livelihood Empowerment Against Poverty (LEAP) programme as a case study. The study assessed how household bargaining affect the labour supply decisions of couples who received the LEAP grant. For the impact evaluation analysis, the study employed difference-in-difference with inverse probability weighting (DD-IPW). All the regression models showed that cash transfers did not significantly affect the labour supply of couples. Women’s bargaining power turned out to be significant and positively affected the labour market decisions of couples.