Fiscal Redistribution and Social Welfare

Abstract

Fiscal policy is a key tool for achieving distributional objectives in advanced economies. Thispaper embeds the discussion of fiscal redistribution within the standard social welfareframework, which lends itself to a transparent and practical evaluation of the extent anddeterminants of fiscal redistribution. Differences in fiscal redistribution are decomposed intodifferences in the magnitude of transfers (fiscal effort) and in the progressivity of transfers(fiscal progressivity). Fiscal progressivity is further decomposed into differences in thedistribution of transfers across income groups (targeting performance) and in the socialwelfare returns to targeting due to varying initial levels of income inequality (targetingreturns). This decomposition provides a clear distinction between the concepts ofprogressivity and targeting, and clarifies the relationship between them. For illustrativepurposes, the framework is applied to data for 28 EU countries to determine the factorsexplaining differences in their fiscal redistribution and to discuss patterns in fiscalredistribution highlighted in the literature.