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International Monetary Fund. Fiscal Affairs Dept., International Monetary Fund. Strategy, Policy, &, and Review Department

benefits accruing to the bottom three deciles ( Figure 2a , fourth set of bars), it also comes with significant undercoverage of lower welfare deciles ( Figure 2b , line). Tiering benefits also eases, but does not completely eliminate, horizontal equity concerns. Figure 2. Benefit Share, Benefit Level, and Coverage Source: Calculations based on India’s 2011–12 National Sample Survey. Note: In panel b, chart bars show the share of each decile receiving different benefit levels under the ratio 4:2:1 for the bottom three deciles, next four deciles, and top three

Mr. David Coady, Devin D'Angelo, and Brooks Evans
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.