Keywords: Poverty; Policy Evaluation; Social Welfare; Social Rate of Return; International Comparison
Nanak Kakwani (China Institute for Income Distribution, Beijing Normal University, China; and School of Economics, The University of New South Wales, Australia)
Xiaobing Wang (Department of Economics, Manchester University, United Kingdom)
Jing Xu (School of Public Economics and Administration, Shanghai University of Finance and Economics, China)
Ximing Yue (School of Finance, Renmin University of China, China)
Assessing the social welfare effects of government safety-net programs has essential implications on successfully addressing income inequality and improving social welfare. A large number of developing counties are investing in a variety of social programs to reduce poverty. The World Bank Report entitled “The State of Social Safety Nets 2015” concluded that almost 1.9 billion people are now beneficiaries of government transfer programs (Honorati et al. 2015). The redistribution policies through taxation and government expenditures are used to overcome poverty and, more generally, to enhance people’s welfare (Kakwani, Li, Wang and Zhu 2019).
This paper offers a new perspective on assessing government cash programs using a framework of social welfare functions. Targeting the poor is a means to improve program efficiency so that the programs achieve their intended objectives of alleviating or reducing poverty. The paper demonstrates how we can use social welfare functions to measure the program efficiency without specifying a poverty line and poverty measures.
In the tax literature, A.C. Pigou (1928) first proposed the precise definition of tax progressivity in his book, Public Finance,1 where he argues that a tax structure is said to be progressive if the average tax rate rises as income increases. This definition of progressivity is consistent with the familiar and much-researched progressive tax principle “the richer people must pay taxes at higher rates.”2 Following this principle, Kakwani (1977) developed a measure of tax progressivity, which is the difference between the concentration index of taxes and the Gini index of pre-tax income. This measure, popularly known a the Kakwani index, is widely used in the analysis of equity in taxation.3
Government safety-net programs transfer cash to the poor, who cannot meet their basic needs. The question is when government transfers are said to be progressive. There exist no formal principle of progressivity of transfers in the literature. In the case of government transfers, we cannot directly apply the same principle of tax progressivity. In this paper, we propose a principle of progressivity of transfers like the one “when the rich receive fewer benefits than the poor.” Utilizing Kakwani’s (1980) Corollary 8.1, we derive a measure of progressivity of transfers as the concentration index of transfers.4 The transfers are progressive (regressive) if the concentration index of transfers is smaller (larger) than zero. We can interpret this measure of progressivity as the gain (loss) of social welfare due to progressivity (regressivity) of transfers when households receive an average of one unit of transfer per person. In addition, we use a decomposition measure to evaluate the horizontal and vertical equity effects of a social intervention based on Kakwani (1984).
All social welfare programs incur costs. Programs ought to be judged based on how much social welfare they generate in comparison to their operational costs. There are two types of costs associated with the running of a program. One is the amount of money that the program transfers to beneficiaries, and the other is the administrative cost. In assessing the programs, it is essential to take account of both these costs. The idea of the social rate of return (SRR) developed by Kakwani and Son (2016) provides a method of incorporating both kinds of program costs. The SRR is defined as the social welfare generated by a program as a percentage of the total cost of the program. In this paper we have extended the idea of SRR to answer many policy questions. The paper demonstrates that social rate return of a program can be decomposed into three factors: (1) horizontal inequity, which measures the loss of social welfare due to change in ranking of individuals caused by the program, (2) an increase in social welfare when everyone in society receives one unit of transfer, (3) a gain (loss) of social welfare when transfers under the program are progressive (regressive). This decomposition provides an insight into understanding the patterns of social programs with useful policy interpretations.
Since the aim of many social programs is to target the poor, it is hence essential to provide a linkage between targeting the poor and the SRR approach (for example, Kakwani, Li, Wang and Wu 2019). We link the two by introducing three alternative principles of targeting. The first principle relates to the universal basic income approach, which has recently become a focus of public debate.5 A critical policy question we address in this paper is under what circumstances a government should adopt the universal basic income scheme over the alternative methods of targeting the poor. The second principle relates to targeting the poor but with equal amounts of transfers to every beneficiary. Our third principle relates to perfect targeting so that the program lifts all the poor out of poverty. We provide a methodology of measuring targeting efficiency of given social welfare programs relative to these three targeting principles.
We then apply this measurement framework to the income distribution data from the Luxembourg Income Study (LIS) Data Base for 44 countries at different stages of economic development, to provide an international comparison of safety-net programs. From this cross-country analysis, we show that governmental transfers can play a critical role in explaining the Kuznets curve.
The rest of the paper is organized as follows: Section 2 discusses the Gini social welfare function; Section 3 describes the method of assessing the impacts of government programs on social welfare; Section 4 presents three targeting principles; Section 5 provides the results and analyses the international comparison; Section 6 concludes and discusses possible policy implications.
1 Dalton (1936) proposed to measure tax progressivity by a shift in the distribution of income due to taxes. We call this measure as the redistribution income due to taxation. Mugrave and Thin’s (1948) is regarded as a seminal paper in the measurement of tax progression at different income levels.
2 See Blum and Kalven (1953), Blum (1979) and Bos and Felderer (1989) for discussion of a range of politically and economically relevant facets. Kakwani and Lambert (1998) defined equity in taxation by means of three axioms, of which this progressive principle is one of them.
3 The Kakwani index was originally defined for measuring progressivity of taxation but is now a standard measure of the progressivity of a social intervention. For example, Gerber et al (2019) used the Kakwani index to study the trends and implications of income tax progressivity among OECD countries.
4 This is a new measure of progressivity of government transfers, which has not been discussed in the literature.
5 For example, Ozler (2017) argues that the relative performance of UBI makes it appealing for consideration, given the poor performance of methods to target the poor in developing countries,
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