On the redistributive efficiency of fiscal policy

Kyriacou, Andreas and Muinelo-Gallo, Leonel and Roca-Sagalés, Oriol (2016): On the redistributive efficiency of fiscal policy.

Abstract

This article analyses the redistributive efficiency of public spending and taxation in a panel of 28 OECD economies during the period 1995-2010. In order to explore how redistribution is achieved through fiscal policies, a two-stage approach is applied. First, we evaluate the redistributive efficiency of public spending and taxation by using Data Envelopment Analysis (DEA) and obtain considerable variation in redistributive efficiency scores across countries. Second, we use panel regression analysis to identify the determinants of these differences and reveal the crucial role of factors capturing the capacity of public officials to design and implement redistributive policies, and political economy factors potentially affecting the redistributive profile of fiscal policies.

• Item Type: MPRA Paper
• Language: English
• Keywords: government efficiency, redistribution, fiscal policy, data envelopment analysis, panel data
• Subjects: E - Macroeconomics and Monetary Economics > E0 - General > E02 - Institutions and the Macroeconomy; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E62 - Fiscal Policy; H - Public Economics > H1 - Structure and Scope of Government > H11 - Structure, Scope, and Performance of Government; H - Public Economics > H5 - National Government Expenditures and Related Policies > H53 - Government Expenditures and Welfare Programs

References

Acemoglu, D., Robinson, J.A., (2008), “Persistence of power, elites and institutions” American Economic Review 98, pp. 267–291.

Acemoglu, D., Naidu, S., Restrepo, P. and J. Robinson (2015),“Democracy, Redistribution and Inequality“ Handbook in Income Distribution Volume 2B. pp. 1885-1966.

Afonso, A., A. Romero, and E. Monsalve (2013), “Public Sector Efficiency: Evidence for Latin America” Inter-American Development Bank. Fiscal and Municipal Management Division. Discussion Paper No.IDB-DP-279.

Afonso, A. and M. St. Aubyn (2006) “Cross-country Efficiency of Secondary Education Provision: a Semiparametric Analysis with Non-discretionary Inputs” Economic Modelling, 23 (3), pp.476-491.

Afonso, A., L. Schuknecht, and V. Tanzi (2010), “Income distribution and public spending: an efficiency assessment” Journal of Economic Inequality 8, pp. 367-389.

Afonso, A., L. Schuknecht, and V. Tanzi (2005), “Public sector efficiency: an international comparison” Public Choice 123(3-4), pp. 321–347.

Aghion, P., E. Caroli, and C. García-Peñalosa (1999), “Inequality and Growth in the New Growth Theories” Journal of Economic Literature 37, pp. 1615-1669.

Alesina, A., R. Baqir, and W. Easterly (1999), “Public Goods and Ethnic Divisions” Quarterly Journal of Economics 114(4), pp. 1243–1284.

Alesina, A., A. Devleeschauwer., W. Easterly., S. Kurlat and R. Wacziarg (2003), “Fractionalization” Journal of Economic Growth, 8, pp. 155–194.

Alesina, Alberto, and Edward Glaeser. (2004), Fighting Poverty in the US and Europe: A World of Difference. Oxford UK: Oxford University Press.

Alesina, A. and D. Rodrik (1994), “Distributive Politics and Economic Growth” Quarterly Journal of Economics 109, pp. 465-490.

Aristotle (1932), The Politics. Harvard University Press

Babones, S. J. and M. J. Alvarez-Rivadulla (2007), “Standardized Income Inequality Data for Use in Cross-National Research” Sociological Inquiry, Volume 77, Issue 1.

Banker R., A. Charnes, and W. Cooper (1984), “Some models for estimating technical and scale inefficiencies’ in data envelopment analysis” Management Science 30, pp.1078-1092.

Barreix, A., J. Roca and L. Villela (2007), “Fiscal Policy and Equity.Estimation of the Progressivity and Redistributive Capacity of Taxes and Social Public Expenditure in the Andean Countries”.Inter-American-Development-Bank. INTAL-INT Working Paper 33.

Bénabou R. (2000), “Unequal Societies: Income Distribution and the Social Contract” American Economic Review 90, pp. 96-129.

Bénabou, R. (2005), “Inequality, Technology, and the Social Contract”. In: Aghion, P.,Durlauf, S.N. (eds.) Handbook of Economic Growth, Chapter 25. North Holland, Amsterdam.

Bradley, D., E. Huber, S. Moller, F. Nielsen, and J. Stephens (2003), “Distribution and Redistribution in Post-industrial Democracies” World Politics 55, pp.193-228.

Castelló-Climent, A., and R. Doménech (2014), “Human Capital and Income Inequality: Some Facts and Some Puzzles” BBVA Working Paper 12/28, Madrid, March.

Charnes, A., W. Cooper and E. Rhodes, (1978), “Measuring the efficiency of decision making units” European Journal of Operational Research 2, pp. 429-444.

Chu, Ke-young, H. Davoodi, and S. Gupta (2000), “Income Distribution and Tax and Government Social Spending policies in Developing Countries”. IMF Working Paper, No. 10/112 May.

Chu, Ke-young, H. Davoodi, and S. Gupta (2004), “Income Distribution and Tax and Government Social Spending policies in Developing Countries” IMF Working Paper, No. 10/112 May.

Coelli, T. and S. Perelman (1999), “A comparison of parametric and non-parametric distance functions: With application to European railways” European Journal of Operational Research 117, pp. 326–339.

Coelli,T., D. Rao and G. Battese (2002), An Introduction to Efficiency and Productivity Analysis, 6th edition, Massachusetts, Kluwer Academic Publishers.

Dahan, M. and D. Tsiddon (1998), “Demographic transition, income distribution and economic growth” Journal of Economic Growth 3(1), pp. 29-52.

Esping-Andersen, G. (1990), The Three Worlds of Welfare Capitalism, Cambridge: Polity Press.

Farrell M. (1957), “The measurement of productive efficiency” Journal of the Royal Statistical Society, Series A (General) Volume 120 (3), pp. 253-281.

Galor, O. and J. Zeira (1993), “Income distribution and macroeconomics” Review of Economic Studies 60, pp. 35-52.

Glaeser, E., R. La Porta, and A. Shleifer (2004), “Do Institutions Cause Growth?” Journal of Economic Growth 9, pp. 271-303.

Goñi, E., H. J. Lopez, and L. Serven (2011), “Fiscal Redistribution and Income Inequality in Latin America” World Development 39(8), pp.1569-1588.

Grigoli, F. (2014). “A hybrid approach to estimating the efficiency of public spending on education in emerging and developing economies”. Fiscal Affairs Department, IMF Working Papers Nº14/19.

Gupta, S. and M. Verhoeven, (2001), “The efficiency of government expenditure experiences from Africa” Journal of Policy Modeling 23, pp. 433-467.

Gupta, S., H. Davoodi and R. Alonso-Terme (2002), “Does Corruption Affect Income Inequality and Poverty?” Economics of Governance 3, pp.23-45.

Halter, D., M. Oechslin and J. Zweimüller (2014). “Inequality and growth: the neglected time dimension” Journal of Economic Growth 19, pp.81–104.

Hauner, D. and A. Kyobe (2010), "Determinants of government efficiency" World Development 38(11), pp. 1527-1542.

Herrera, S., and G. Pang (2005) “Efficiency of public spending in developing countries: an efficiency frontier approach” World Bank Policy Research Working Paper Series 3645.

Hoff, A. (2007), “Second stage DEA: comparison of approaches for modeling the DEA score” European Journal of Operational Research 181, pp. 425-435.

Hollingsworth B. and J. Wildman (2003), “The efficiency of health production: re-estimating the WHO panel data using parametric and non-parametric approaches to provide additional information” Health Economics 12(6), pp. 493-504.

Huber, E. and Stephens, J. (2006), “Combating Old and New Social Risks”. In Armingeon, K. and Bonoli, G. (eds) The Politics of Post-Industrial Welfare States: Adapting Post-War Social Policies to New Social Risks, New York, Routledge.

Huber, E., Stephens, J. (2014), “Income inequality and redistribution in postindustrial democracies: demographic, economic and political determinants” Socio-Economic Review 12, pp. 245-267.

International Monetary Fund (2014), “Fiscal policy and Income Inequality” IMF Policy paper.

Iversen, T., Soskice, D (2011), “Dualism and political coalitions: Inclusionary versus exclusionary reforms in an age of rising inequality”, paper presented at the conference on “The Future of Democratic Capitalism” Swiss Federal Institute of Technology, Zurich, Switzerland, June 16–18.

Jenkins, S (2014), “World Income Inequality Databases: an assessment of WIID and SWIID” Institute for Social and Economic Research (ISER) Working Paper Series, pp. 2014-2031.

Joumard, I., M. Pisu, and D. Bloch (2012), “Tackling Income Inequality: The Role of Taxes and Transfers” OECD Journal: Economic Studies, pp. 37–70.

Kammer, A., Niehues, J. and Peichl, A. (2012) “Welfare regimes and welfare state outcomes in Europe” Journal of European Social Policy 22 (5), pp. 455–471.

Kaufmann, D., A. Kraay, and M. Mastrutzzi. (2010), “The worldwide governance indicators: methodology and analytical issues” World Bank Policy Research Paper 5430.

Kenworthy, L. and J. Pontusson (2005), “Rising inequality and the politics of redistribution in affluent countries” Perspectives on Politics 3(3), pp. 449-471.

Lambert, P.J. (2001), The Distribution and Redistribution of Income. Manchester: Manchester University Press.

Liu J.S., Lu L.Y.Y., Lu W.M. and Lin B.J.Y. (2013), “A survey of DEA applications” OMEGA 41, pp. 893-902.

Lustig, N. and S. Higgins (2012), “Commitment to Equity Assessment (CEQ): Estimating the Incidence of Taxes and Benefits Handbook,” Tulane Economics Department Working Paper and CIPR (Center for Inter-American Policy and Research) Working Paper, New Orleans, Louisiana, July.

Mahler, V. and D. Jesuit (2006), “Fiscal redistribution in the developed countries: New insights from the Luxembourg Income Study” Socio-Economic Review 4, pp. 483-511.

Martínez-Vázquez, J., V. Vulovic and B. Moreno-Dodson (2012), "The Impact of Tax and Expenditure Policies on Income Distribution: Evidence from a Large Panel of Countries" Hacienda Pública Española 200(1), pp. 95-130.

McDonald, J. (2009), “Using least squares and tobit in second stage DEA efficiency analyses” European Journal of Operational Research 197(2), pp. 792-798.

Meltzer, A. and S. Richard. (1981), “A rational theory of the size of government” Journal of Political Economy 89, pp. 914–927.

Milanovic, B. (2000), “The median voter hypothesis, income inequality and income redistribution: an empirical test with the required data” European Journal of Political Economy 16, pp. 367–410.

Milanovic, B. (2010). “Four critiques of the redistribution hypothesis: An assessment” European Journal of Political Economy 26, pp. 147–154.

Muinelo–Gallo, L. and O. Roca-Sagalés (2013), “Joint determinants of Economic Growth, Income Inequality, and Fiscal Policies” Economic Modelling 30(1), pp. 814-824.

OECD (2008), “Growing unequal. Income distribution and poverty in OECD countries” OECD, Paris.

OECD (2011), “Divided We Stand: Why Inequality Keeps Rising” (OECD Publishing).

OECD (2012) “Reducing Income Inequality While Boosting Economic Growth: Can It Be Done?” In Economic Policy Reforms: Going for Growth. Paris: OECD Publishing.

Ostry, J., A. Berg and G. Tsangarides (2014), “Redistribution, Inequality, and Growth” International Monetary Fund - Research Department.

Perotti, R. (1996), “Growth, income distribution and democracy: what the data say” Journal of Economic Growth 1(2), pp. 149-187.

Persson, T. and G. Tabellini (1994), “Is inequality harmful for growth?” American Economic Review 84, pp. 600-621.

Rajkumar, A.S. and V. Swaroop (2008), “Public spending and outcomes: Does governance matter?” Journal of Development Economics, 86(1), pp. 91-111.

Ramalho, E.A., Ramalho, J.S. and Henriques, P.D (2010). “Fractional regression models for second stage DEA efficiency analyses” Journal of Productivity Analysis 34, pp. 239-255.

Rodríguez, F. (2004). “Inequality, Redistribution, and Rent-seeking” Economics and Politics 16(3), pp. 287-320.

Schneider, F. and D. Enste (2000): “Shadow economies: size, causes, and consequences” Journal of Economic Literature 38, pp. 77–114.

Schneider, F., Buehn, A., and C. Montenegro (2010), “Shadow economies all over the world: new estimates for 162 countries from 1999 to 2007”. World Bank Policy Research Paper 5356. Washington DC: The World Bank.

Schneider, F. and A. Buehn (2013), “Shadow Economies in Highly Developed OECD-Countries: What are the Driving Forces?”, Discussion Paper, Department of Economics, University of Linz, Linz, Austria.

Simar, L. and P. Wilson (1998), “Sensitivity analysis of efficiency scores: how to bootstrap in non parametric frontier models” Management Science 44, pp. 49-61.

Simar, L. and P. Wilson (2000), “A general methodology for bootstrapping in non-parametric frontier models” Journal of Applied Statistics 27(6), pp. 779-802.

Simar, L. and P. Wilson (2007), “Estimation and inference in two-stage, semiparametric models of production processes” Journal of Econometrics 136(1), pp. 31-64.

Simar, L. and P. Wilson (2011), “Two-stage DEA: caveat emptor” Journal of Productivity Analysis 36, pp. 205-218.

Solt, F. (2009), “Standardizing the World Income Inequality Database” Social Science Quarterly 90(2), pp. 231-242.

Solt, F. (2014), “Standardizing the World Income Inequality Database” Working Paper. University of Iowa.http://myweb.uiowa.edu/fsolt/papers/Solt2014.pdf.

St. Aubyn, M., Pina, A., Garcia, F. and Pais, J. (2009), “Study on the efficiency and effectiveness of public spending on tertiary education” European Commission Economic Papers Nº390.

Thanassoulis, E. (2001), Introduction to the Theory and Application of Data Envelopment Analysis. Kluwer Academic Publishers.

Thewissen, S. (2014), “Is it the income distribution or redistribution that affects growth?” Socio-Economic Review 12(3), pp. 545-571.

Treisman, D. (2002) and D. Treisman (2002), “Decentralization and the quality of government”, mimeo: University of California.

Varabyova, Y. and J. Schreyögg (2013), “International comparisons of the technical efficiency of the hospital sector: Panel data analysis of OECD countries using parametric and non-parametric approaches” Health Policy 112, pp. 70-79.

Wang C., K. Caminada and K. Goudswaard (2012), “The redistributive effect of social transfer programs and taxes: a decomposition across countries” International Social Security Review 65(3), pp. 27-48.

Wang C., K. Caminada and K. Goudswaard (2014), “Income redistribution in 20 countries over time” International Journal of Social Welfare 23, pp. 262-275.

Wolszczak-Derlacz J. and Parteka A. (2011), “Efficiency of European public higher education institutions: a two-stage multicountry approach” Scientometrics, Springer 89(3), pp. 887-917.

Woo, J., E. Bova, T. Kinda, and Y. Zhang, (2013), “Consequences of Fiscal Consolidation and the Role of Fiscal Policy: What Do the Data Say?” IMF Working Paper Fiscal Affairs Department.