Can a Poverty-Reducing and Progressive Tax and Transfer System Hurt the Poor? - Working Paper 405
Working Papers

Can a Poverty-Reducing and Progressive Tax and Transfer System Hurt the Poor? - Working Paper 405

5/21/15
Sean Higgins and Nora Lustig
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Abstract

Whether the poor are helped or hurt by taxes and transfers is generally determined by comparing
income distributions before and after fiscal policy using stochastic dominance tests and measures
of progressivity and horizontal inequity. We formally show that these tools can fail to capture an
important aspect: that a substantial proportion of the poor are made poorer (or non-poor made
poor) by the tax and transfer system. We call this fiscal impoverishment, and axiomatically derive
a measure of its extent. An analogous measure of fiscal gains of the poor is also derived, and we
show that changes in the poverty gap can be decomposed into our axiomatic measures of fiscal
impoverishment and gains. We also establish dominance criteria for unambiguous comparisons of
fiscal impoverishment and gains under the current system to that under a proposed reform, for a
range of possible poverty lines. We illustrate using Brazilian data.