Enhancing public resources through progressive tax policies

Enhancing public resources through progressive tax policies can help reduce inequality, highlights a joint UN-Oxfam study

Bangkok (ESCAP News) -- A joint study released today by the United Nations Economic and Social Commission for Asia and the Pacific (ESCAP) and Oxfam warned that the increase in inequality in several economies of Asia-Pacific, if left unchecked, could undermine long-term economic growth, diminish the prospects for further reduction in poverty and threaten social cohesion.

Measured by any metric, evidence shows that the income gap between the rich and poor in several economies of the region has widened considerably in recent decades. The study notes that the population-weighted income Gini coefficient, based on household income estimates, increased from 37 to 48 between 1990 and 2014; a spike of almost 30 per cent in less than three decades. At the same time, private wealth concentration has made the region the most unequal in terms of wealth distribution. Today, Asia’s ‘super-rich’ outstrip their North American and European peers in both headcount and wealth, while the share of the bottom income groups in the growing economic pie stagnates.

In her remarks, United Nations Under-Secretary General and Executive Secretary of ESCAP Dr. Shamshad Akhtar said, “High inequality in income and wealth hurts medium and long-term growth, reinforces inequality of opportunities, and undermines social cohesion. Strengthening public resources through progressive tax policies and enhancing international and regional cooperation on tax matters, along with enhanced financial inclusion, can help reduce inequality.”

The joint study entitled, Taxing for Shared Prosperity, argues for a comprehensive strategy to reverse the trend of rising inequality. It highlights how public finance in general, and tax policies in particular, can help governments tackle the challenge.

The study underscores that the potential of tax policies in reducing inequality is yet to be fully leveraged in Asia-Pacific developing countries. The average tax revenue levels in several economies of the region remain low compared to other developing regions and many of these countries are only achieving half or less of their maximum revenue potentials. As a result, the fiscal space for proactive public spending to enable the poor in exploring economic opportunities and protect them from external shocks through social security networks has been limited.

Furthermore, the overall tax mix in Asia-Pacific developing countries remains highly skewed towards indirect taxes, while progressive direct taxes, such as the personal income tax, remain small in most cases. Direct taxes account for roughly a third of the region’s total tax revenue at 36.1 per cent, in comparison to 55.8 per cent in the Organisation for Economic Co-operation and Development countries. Property and wealth taxes, which are instrumental in adjusting wealth distribution and break the inheritance of excessive inequality cross-generations, are also largely missing.

Recognizing these challenges, the study provides a number of policy options that could be considered by Asia-Pacific developing countries. It encourages reforms to increase the share of progressive direct taxes in the overall tax mix, so that not only the overall revenues increase but also their potential in adjusting income and wealth distribution is enhanced. It also highlights the importance of international and regional tax cooperation, including through the United Nations platforms, to ensure that large corporations and wealthy individuals cannot evade their fair share of tax by exploiting international taxation loopholes.

Ms. Lilian Mercando, Oxfam’s Regional Director for Asia added, “This study explains why there must be a fair distribution of tax burdens across different income groups to eliminate extreme inequality and break the spiral of growing income and wealth gaps. Countries must build a benign tax culture through fair taxes and accountable spending.”

Download the report: http://bit.ly/APSharedProsperity

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