By David Coady and Sanjeev Gupta
The issue of rising income inequality is now at the forefront of public debate. There is growing concern as to the economic and social consequences of the steady, and often sharp, increase in the share of income captured by higher income groups.
While much of the discussion focuses on the factors driving the rise in inequality—including globalization, labor market reforms, and technological changes that favor higher-skilled workers—a more pressing issue is what can be done about it.
In our recent study we find that public spending and taxation policies have had, and are likely to continue to have, a crucial impact on income inequality in both advanced and developing economies.
In advanced economies, this is especially important given that the ongoing fiscal adjustment needs to be continued for many years to reduce public debt to sustainable levels. But it is equally important in developing economies where inequality is relatively high.
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