The IMF Working Papers series is designed to make IMF staff research available to a wide audience. Almost 300 Working Papers are released each year, covering a wide range of theoretical and analytical topics, including balance of payments, monetary and fiscal issues, global liquidity, and national and international economic developments.
Fiscal policy is a key tool for achieving distributional objectives in advanced economies. This
paper embeds the discussion of fiscal redistribution within the standard social welfare
framework, which lends itself to a transparent and practical evaluation of the extent and
determinants of fiscal redistribution. Differences in fiscal redistribution are decomposed into
differences in the magnitude of transfers (fiscal effort) and in the progressivity of transfers
(fiscal progressivity). Fiscal progressivity is further decomposed into differences in the
distribution of transfers across income groups (targeting performance) and in the social
welfare returns to targeting due to varying initial levels of income inequality (targeting
returns). This decomposition provides a clear distinction between the concepts of
progressivity and targeting, and clarifies the relationship between them. For illustrative
purposes, the framework is applied to data for 28 EU countries to determine the factors
explaining differences in their fiscal redistribution and to discuss patterns in fiscal
redistribution highlighted in the literature.