This paper identifies fiscal policies, specifically tax and expenditure policies, that would contribute to reducing horizontal (or group) inequalities (HIs). It reviews how to identify relevant groups and how best to measure inequalities between them – both in income and in other dimensions. It notes the lack of adequate socioeconomic data broken down according to ethno-cultural categories in many countries, and suggests ways in which existing data may be used instead. It then looks firstly at taxation policy, and identifies changes to such policy that would contribute to reducing HIs. These include improving the progressiveness of the tax structure; tailoring taxes to group behaviour; altering the regional balance of taxation and revenue distribution; and raising the amount of tax collected to provide revenue for HI-reducing expenditures. Turning to expenditure policies, it notes that improvements in HI can be brought about through reallocation in the production, operation and consumption of publicly funded services. Policies are outlined for each category. These include: affirmative action policies changing group participation in government contracts for the construction of public facilities and in employment in the public sector; a focus on pro-poor public goods and those that favour particular groups; locating a higher proportion of public goods in regions where poor groups are concentrated; and appropriately designed transfer payments. The paper then provides an example, by reviewing the ways in which fiscal policies were used to reduce HIs in Malaysia. It concludes by setting out the processes by which the policies proposed could be put into practice.
CRISE Working Paper No. 65, 46 pp.