Event Transcript
Fiscal Policy and Income Inequality:
Question and Answer Session
Host:
Adam S. Posen, Peterson Institute for International Economics
Speakers:
David Lipton, International Monetary Fund
Nancy Birdsall, Center for Global Development
Robert Z. Lawrence, Peterson Institute for International Economics
Peterson Institute for International Economics, Washington, DC
March 13, 2014
Unedited transcript
Adam S. Posen: Thank you Robert. I’d like to ask our three speakers to come up, attach your microphone
to your lapel and get ready for discussion. Unless David would like to rebut something that
Nancy and Robert said, I would open it up the questions [inaudible 00:00:21].
As usual, there is a standing mic at the back. There’s a moving microphone up front, which
unfortunately is not moving well. This microphone is being installed, but that’s okay.
Please identify yourself. And, even if making a statement, pretend it’s a question. That’s not
directed at you.
Jo Marie Griesgraber: Hi, this is Jo Marie Griesgraber with New Rules for Global Finance. And, first, I
want to congratulate the IMF researchers and also commentators. Robert, I want you on
my board. I wanted to note that the entire paper posits individual countries as though
they’re islands and I think we really do need to see the interconnectedness. And, I guess,
I’m--my comments are two--are recommendations for future worker application. And
there’s a lot of work going on now not only through BAPS, but also through the IMF looking at cross border tax policies and their consequences for the poor and I think that needs
to be integrated into this paper because there’s more than a leaky bucket when it--in terms
of loss of tax revenue especially to the poorest countries.
And, another point--
Adam S. Posen: Not a point, a question, please.
Jo Marie Griesgraber: Question is, okay, how are you reconciling increasing the age of retirement when the
earth has a surplus of young unemployed people?
Adam S. Posen: Thank you. David, do you or anyone else want to comment on [inaudible 00:02:13]?
David:
I’m going to comment on a couple of pieces of this. On your question, I think it’s appropriate in some places and not on others. It really matters what the demographics look like. It
is an issue when the dependency ratio is rising and when there are fewer workers to support
the retired or retiring community. And it may not be as pertinent an issue in a country like
Mexico with a huge number of young people in its demographic.
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So I think that the question of what--and I think the paper goes into this, the question of
what is the right treatment of pensions depends on objectives about the pension system
itself that the objectives of the pension system are fulfilled, but also the fiscal circumstances
in which the country finds itself that it all has to work out and add up and be consistent
with overall macro stability.
Adam S. Posen: Thank you. Unless Nancy and Robert wants to come in, this gentleman here.
Vito Tanzi:
I am Vito Tanzi. I was a Director of the Fiscal Affairs Department of the Fund for 20
years when some of these issues started coming out with the several conferences and we’ve
published books, et cetera, et cetera.
I want to make two or three comments. The question of being--
Adam S. Posen: I’d actually ask you to phrase them Vito as questions rather than comments.
Vito Tanzi:
No, no, no, they are questions, but coming to a comment. The first comment is that the
income distribution is very much like health. You can deal with health problem countries
either by doing something after the people get sick or to prevent them from getting sick.
And, much of the discussion in today’s--it had to do really with the fact that whether
worsening income distribution and what kind of taxes and spending we introduce to
correct that. What about the crony capitalist? We read a lot about--they were in the
comments. They were referenced too to political process. We know that the people leave
governments and become [inaudible 00:04:57], what are they doing as a [inaudible
0:04:59]. They are influencing the capitalistic process.
Really, the income distribution issue should be faced not only in an expo sense after the scene
has been committed, but in trying to think about the arrangement that we have introduced in
society. Globalization has been mentioned. Clearly, globalization came with a sense of politics,
which are liberalized capital movement, but at the same time, we didn’t do anything about coordinating this process so that we could continue taxing people. This was the first quick question.
The second one, which was really to me is a strange omission is that we talk a lot about the
fiscal policy and I’m glad I’m a fiscal economist. I’ve spent my life in the last half century on
this, but what about mandatory policy? Ask yourself zero interest rate policy, who is getting
the loans from the Federal Reserve System and what are they doing with that money? I get
letters from Citibank or American Express, which tell me that if I want the--
Adam S. Posen: No, don’t hold your finger up at me. You’ve done enough Vito.
Vito Tanzi:
I’m finishing. If I want to borrow, I can pay 15% rate when everybody else tells me that
interest rate is at zero, who is benefiting from that?
Adam S. Posen:
Thank you. Just to note on the--I’m not trying to be mean to any particular person, but we
want to allow as many people as possible to comment and that’s why we’re constraining people.
In terms of the mandatory policy issue, it’s not the topic of today, but I would comment to you
the studies done at the Bank of England some of which while I was there looking at the distributional impacts of quantitative easing policy and then we actually find they’re quite small.
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But turning to the more important topics of today would--Nancy, do you want to say
something?
Nancy:
I just want to make the point in thinking about Vito’s question or comment. We’ve had
this phenomenon in the last year of lots of people going to the streets. Most recently
in Venezuela, it’s a different issue, but in Brazil, in Turkey, et cetera. And, a lot of the
discussion has been about corruption if they’re objecting on the--I think that at the heart
of it however is this vague--this sense that somehow those already have assets are reaping all
the rents. And so, it’s just a comment on there are connections between rising inequality,
what’s the underlying causes and the politics that Rob mentioned. And, we see that
phenomenon I think a lot more of it has to do subconsciously perhaps with the fact that
people know especially in developing countries that the rich are not paying their taxes.
I mean, in Pakistan, there are only 500 households that pay the Personal Income Tax and
it’s true that globalization is undermining the ability to tax capital. All these other things
are going on that are also problematic, but there’s underlying that a sense of unfairness out
there, which is part of the reason there are many win-win possibilities for redistribution.
Adam S. Posen: Cool! Robert, David.
David:
Well, the paper makes an important examination of the distinction between what happens
when you have market incomes and then what happens of a disposable income. But of
course, the market income itself is determined by a whole set of policies and some of those
policies also influence income and actually the paper is very careful to mention these other
policies and it notes that we need to balance redistribution that might take place through
explicit means, say an earned income tax credit or through a regulatory mean, say a
minimum wage. Ultimately, those two will affect the market outcomes.
Now, I referred earlier to the evidence of what’s happened in fiscal policy in terms of the
way it has become weaker as a redistributive mechanism, but I also believe that regulatory
policy and other forms of government action, which can affect the income distribution,
the market income distribution have also exacerbated inequality. So that it is important
to have a comprehensive view. What we’ve got in the study is a focus on one dimension,
but we shouldn’t lose sight of the fact that ultimately, the market outcome is going to be
heavily influenced by the other types of policies which are implemented in regulation, in
competition policy, in financial regulation and so on.
Adam S. Posen: Okay. I want to try to get a couple more questions in, yeah.
Nancy:
On that?
Adam S. Posen: Yeah.
Nancy:
All of that may be true, but the bottom line is that most of the difference between market income and the net inequality--most--sorry. In Latin America, in Africa, the market distribution
of income is not much more unequal than in Western Europe. As David pointed out, most of
the difference has to do with the fiscal--with what government is doing on the fiscal side.
Adam S. Posen: Okay. David, do you want to say something?
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David:
Just briefly, yeah, I did want to say that there is--if you take a look at our paper, I think you’ll
see that there’s a lot in there that’s not about addressing things after the fact, but rather trying
to use fiscal instruments in a way that will help sustain better distributions over time. Health
education, the use of progressive or wealth and property-based taxation is meant to affect the
distribution of income over time abstracting from the specifics of how the political process
works. I think there’s really quite a lot in this paper that’s in the category that could be thought
of as helping to set the stage or if you will, prevent maldistribution of income as time goes on.
Adam S. Posen: Great. I have two questions at this table and then, they may want to stand up at the
microphone, that’s fine.
Valerie Rouxel:
Valerie Rouxel from the EU Delegation in Washington. I have a quick question to David
along the lines with your thinking on how fiscal policy affects redistribution. Is there some
thinking given to how this will have an impact on the regular surveillance of the IMF’s
activities? And specifically, how do you see this?
Adam S. Posen: Yeah.
David:
I guess as I started by saying we work on this subject everyday. And, in some sense, what
we’re trying to bring to everyone is the compendium of what we’ve learned. Now, of course,
as we sit and think about it, we perhaps see things more clearly and it will give us better ways
to respond. I think the injection of this subject into article four is going to change mainly
because our member countries are more interested. More are asking about it. Their people
are either asking about it or protesting about it. I think if you look into your crystal ball, you
may foresee that this is a subject that will garner increasing interest this time goes on.
So, we feel we have some experience that will be useful and will continue doing work to try
to make sure we’re ready to respond to this kind of question.
Adam S. Posen: Correct.
David:
But, in some, I do think that it will be more and more demanded by our members as a
topic of discussion.
Adam S. Posen: Anders.
Anders Åslund:
My name is Anders Åslund here at the Peterson Institute. I have a question for David about
fund policy on lump sum taxation. In poor countries with awful governance, this is an effective policy to bring out individual entrepreneurs by granting them lump sum taxation at the
low level. It makes them legal. It activates them. It shields them from all kinds of bureaucratic
troubles. When advising the [inaudible 00:13:57] government, this worked. Ten percent of
the population goes into lump sum taxation and these were the poor. And, in Ukraine, 15%.
The IMF has traditionally a negative policy towards this because for good reasons, you
don’t like low post and I don’t think that once you [inaudible 00:14:18] that far, [inaudible
00:14:19] of you. Thank you.
David:
That’s a good question. I think it’s right that we like to keep tax systems as simple as is
practicable. But many countries do face the challenge of bringing informal sectors into the
formal economy. I was just in Mexico, Peru and Chile in the last week and in each of those
countries, this is a huge question, a huge challenge. In say Peru, the question is put--what
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incentive do people in the informal sector have to come in if you are getting a noncontributory pension for life and you’re paying no taxes, what’s the incentive to come in.
Now, as Nancy points out, when you’re in the formal economy, in time, there can be greater
credit opportunities and so on, but it is a challenge to ask, what’s the proper fiscal regime
that’s consistent with a plan to try to bring greater formality? The Peruvians are considering
this question. And, in our discussions, they raised the question of, could there be a transition
on arrangements with low tax rates something along the lines of what you’re talking about. I
think it’s a good subject for discussion. We’ll make that the subject of our next paper.
Male Speaker:
[Inaudible 00:15:49]. First, let me say you’ve got the genie out of the bottle. So, first of all,
can you give a sense and Nancy referred to this in some sense, but anyway, can you give a
sense in terms of the potential efficiency gains in emerging markets versus efficiency--actual
efficiency gains in advanced economies? And secondly, you acknowledged that there has
been a decrease in poverty based on growth. The gains that come from growth, how do they
compare to the gains that’s coming from fiscal [inaudible 00:16:39].
David:
Again, very good question. Again recalling my visit to Latin America last week and Peru,
this is a big subject. They have been, until very recently, been growing very rapidly and they
also have programs to support the poor, better health and education more both in urban
poor areas and in rural areas. They have CATS transfer program that they’re working on
and they are finding that the poverty rate is declining very rapidly, but it is actually quite
hard to figure out whether--it’s the usual question, whether it’s because of the growth or
because of the transfer programs.
I think the weight of opinion that I heard when I was there was that it was much more because of the growth than because of the social programs and the redistribution especially in
what’s happening to people who live in rural areas, they cited studies, but I haven’t looked
at it closely enough to know. I think the moral of the story is that whatever the division, it
certainly makes sense to work on both. Peru needs to--for example, needs policies that are
going to overcome the slowdown in growth that they’ve just experienced to raise the potential growth rate, bring more people into the formal economy and grow more rapidly, build
infrastructure and so on, improve their health and education spending and make sure that
the reach of their cash transfer programs extend.
So they really should be working and can be working on all of these margins and there’s no
reason not to be doing at all.
Adam S. Posen:
Great. Nancy had a quick comment and then the last question will be the lady at the back right.
Nancy:
I just want to comment. It is really mostly growth and we can understand that if you
think of groups of people in these countries who are poor and then there’s a second group.
We call them the strugglers or the anxious poor, the new poor, who have gone above the
poverty line so they do not really get conditional cash, they don’t get cash transfers, but
they’re not in the secure middleclass. They’re the ones who benefit from noncontributory
pensions. They’re the ones mostly in the informal sector. They’re the ones where it’s tough
to get them into the formal sector.
And then you have the middleclass if you try to put more money into basic health and
education, [inaudible 00:19:14] helps the poor. It’s not working for the reason that Robert
mentioned. Fifty percent of households with $10 a day or over, which makes the middleclass
in Latin America send their children to private schools. So they’ve already opted out.
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So this thing of trying to be redistributive mostly on the expenditure side, it’s really tough.
That’s one of the big challenges and that’s one of the reason I emphasize the revenue side
and more collective goods to get the growth engine going and then you might get out of
this vicious circle in many countries.
Adam S. Posen: Great! Last question for today.
Female Speaker: [Inaudible 00:19:56]. If [inaudible 00:20:01] is done so that the [inaudible 00:20:03]
probably the underlying sustainable growth, how do you see from how it’s affecting the
current dynamic programs of Europe and in particular, are you satisfied with the level of
protecting the poor in countries like Greece where [inaudible 00:20:20]? And, if there is
reason for redistributing through fiscal processing, how do you evaluate the decision of
the government [inaudible 00:20:34] primary [inaudible 00:20:35] to redistribute the low
pension in [inaudible 00:20:39]? Thank you.
Adam S. Posen: Our guest may want to stick on the principles rather than the specific country, but that’s up
to him.
David:
No. I think the principle is of course that if you lose macro-stability, you’re going to fail on all
fronts. People in all income levels will have problems. Jonathan [inaudible 00:21:06] study
shows that on average, redistributive policies don’t seem to have caused problems. There isn’t a
leaky bucket on average, but that doesn’t mean that redistributive policies can’t cause problems.
Let me give you the example of Venezuela. Clearly, at the beginning, President Chávez
undertook redistributive policies and provided health and education for an awful lot of
poor people. I haven’t seen a study of its effectiveness, but certainly, people liked him. In
time, those transfers have become huge. They’ve become a much larger fraction of GDP.
The government doesn’t raise taxes to pay for that. They’ve been printing money to pay for
transfers. It’s destabilizing the economy and that is having very dire consequences, and as
we see from the protests, people are unhappy.
So, the key point and it’s the sort of the traditional IMF point is that really keeping macrostability is extremely important. So countries have to live within their means. And Greece
has had a very difficult set of circumstances the last few years. We have tried to help them
design an adjustment path to overcome their problems along which they are able to do the
best they possibly can to help ensure that poor people aren’t adversely affected, but there are
limits given the circumstances that they face.
Adam S. Posen: Thank you David. Thank you everyone for coming out today. Again, commendations to
the staff of the fiscal department of the IMF that did some really creative thorough work.
Thanks to our discussants, Robert and Nancy.
One last advertising plug, which jumps off the last question. Next month in April 3rd and 4th in
New York, we’re doing a joint conference with the Stavros Niarchos Foundation on dealing with
youth unemployment in practical terms. And, we have gathered some of the world’s best labor
economists to come up with proposals taking for granted if aggregate demand is stuck where it is
because you say you’re Greece and you’ve reached the limits of what the IMF reasonably thinks
you can spend, what else can you do? And, that’s where we’re going to go next.
But really, thanks to everyone and especially, thanks to David [inaudible 00:23:38].
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