The implications of horizontal and vertical inequalities for tax and expenditure policies

While horizontal inequality, or inequality between groups of people, is increasingly recognised as an impediment to long-term poverty reduction in multi-ethnic societies, there is less clarity still on which policy instruments are most suited to correcting group-wise resource distribution. Drawing on experiences from around the world, a new report brought out by the Centre for Research on Inequality, Human Security and Ethnicity (CRISE) at Oxford University now examines the potential of fiscal (tax and expenditure) policies in reducing horizontal inequalities.

Understanding and altering the distributive impact of the fiscal system in a particular country requires systematic data on the characteristics of specific groups, particularly those that are disadvantaged, and the nature of inequality in that society. Although this kind of data may not always be readily available, enough is generally known already, or can be collected through small surveys, focus groups, census data and public expenditure accounts. Tax and expenditure policies can then be designed so that they alter inequality in a desired direction. Tax policy is particularly effective in this since politically, it is easier to redirect expenditure to deprived groups if this is done out of increased total expenditure, rather than at the direct expense of better-off groups. 

Policies likely to reduce HIs include:

• progressive direct and indirect taxation, which also contributed to improving vertical inequality
• regional tax and expenditure policies, where deprived groups are regionally concentrated
• within regions, tax (especially property taxes) and expenditure (including transfer payments) designed to help deprived people and locations
• government contracts and employment in public facilities targeted at deprived groups
• publicly provided goods and services targeted at deprived groups
• government procurement policies that encourage an equitable private sector

In order to work, fiscal policies that aim to correct HIs must be coherent in their objectives and implemented effectively. This requires political will on the part of national governments, and the need to coordinate the policies with the rest of the economic policy-making process. In addition, it is important that policies are implemented transparently to avoid a sense of unfair treatment by particular groups or individuals. The report points out that while donors can assist governments in data collection exercises and ensure that their aid allocations help reduce inequality, NGOs and communities can contribute through advocacy and monitoring activities.