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HOMENews Lacea LamesSocial Programs, and Not Taxes, Reduce Inequality in Latin America

Social Programs, and Not Taxes, Reduce Inequality in Latin America

​​​Social programs, such as Familias en acción and healthcare and education subsidies, have a real impact on reducing inequality in the countries of the region. These topics were addressed during the conference about inequality and fiscal policy. In the picture, Darío Rossignolo.

• During the second day of the Lacea Lames meeting, that will be held at Universidad EAFIT until this Saturday, November 12th, Ángel Melguizo, Marcela Meléndez and Darío Rossignolo focused on the inequality issue.

• The talk was about why Colombia has the worst fiscal performance regarding the reduction of inequality gaps, as well as why the taxes for Latin American middle class exceed the public expenditure.

The Latin American tax and public expenditure system doesn’t contribute to inequality reduction. That was the main conclusion of Ángel Melguizo’s (Ocde), Marcela Meléndez’s (Universidad de los Andes) and Darío Rossignolo’s (Universidad de Buenos Aires) research works presented this Friday, November 11th, in the conference about inequality and fiscal policy, as part of the Lacea Lames meeting, which will take place until this Saturday, November 12th, at Universidad EAFIT with the support of this university and the Colombian Central Bank.

Social transfers in kind do have a real incidence on the reduction of income gaps. In Colombia, they are represented by social programs, such as Familias en acción and Adulto mayor; housing subsidies; and healthcare and education subsidies for families that are part of the System for the Identification of Potential Beneficiaries of Social Programs (Sisben.)

“This country doesn’t work hard to reduce inequality in terms of public expenditure and taxes, but social transfers in kind have a significant impact on it. Besides, if we compare ourselves with other countries, we have the worst landscape and gigantic pending matters,” stated Marcela Meléndez, researcher at the Universidad de los Andes.

Moreover, according to the researcher, in Colombia, rich people pay less taxes than poor people, i.e. there is a regressive tax system, which makes inequality gaps more difficult to close. 

In Argentina, social programs such as the universal allocation per child (that grants unemployed people or people whose income is lower than the minimum wage a monthly fee per each child under the age of 18) or the social security inclusion plan (that helps those who don’t meet the requirements to get a pension) show a great impact on people’s final income.

According to Darío Rossignolo’s (Universidad de Buenos Aires) economic research works, these transfers made by the government are the ones that help reduce the Gini coefficient, i.e. they close the gap between the rich and the poor. 

​Middle Class: Net Contributor

Other study presented during the conference analyzed the total amount of taxes paid by the middle class in the region and compared it with the total benefits the government gets. The outcomes show that this population segment, earning between 10 and 50 dollars a day, pays more than what they receive; but the ‘vulnerable’ middle class, earning between 4 and 10 dollars a day, receives more than what they pay.

The researchers’ hypothesis to explain this phenomenon is that, due to its socioeconomic characteristics, middle class people are too rich to access social inclusion programs, but too poor to access accounting advice. Therefore, they end up paying more taxes without receiving social benefits in return.

Investment of 25% to Grow in Latin America

Considering that Latin America is one of the world’s regions with lower savings rates—only above Sub-Saharan Africa—, the conference about savings in Latin America took place this Friday, November 11th.

According to José Juan Ruiz, chief economist at the Inter-American Development Bank (IDB), experts agree that a minimum investment rate of 25% is required for a long time. It’s a figure that the region has never reached over the last 30 years, and that leads to spend less in education and capital formation.

“I could say that low savings rates kill the chances to invest, and we believe that bringing savings from abroad to complement ours is not the best option. History shows that every time Latin America does that, it enters risky processes leading to macroeconomic crisis that hinder growth,” said Ruiz. 

Some of the reasons are that there is a severe lack of financial education, people don’t trust banks, there are companies that don’t manage to be a part of the system and governments probably spend more than they get. Regarding this issue, it is suggested to review the pension funds—important for the continent’s future—, and the quality of the expenditure of the public and private sectors. With these steps, it would be possible to save three more percentage points, which would be enough.

The Colombian case shows a serious deficit, with an average growth of 2%. Therefore, it is necessary to analyze matters such as financial inclusion and the way families save to be able to thrive.
​Contact information for journalists 

Press Room Lacea-Lames 2016
Alejandro Gómez Valencia
Phone: 2619500 ext. 9931
Mobile: 3007842646

Juan Carlos Luján Sáenz
Phone: 2619500 ext. 9883
Mobile: 3167448573