Measuring Impoverishment: An Overlooked Dimension of Fiscal Incidence

Abstract

The effect of taxes and benefits on the poor is usually measured using standard poverty and inequality indicators, stochastic dominance tests, and measures of progressivity and horizontal inequity. However, these measures can fail to capture an important aspect: that some of the poor are made poorer (or some of the non-poor made poor) by the tax-benefit system. We call this impoverishment and formally establish the relationships between impoverishment, stochastic dominance tests, horizontal inequity, and progressivity measures. The directional mobility literature provides a useful framework to measure impoverishment. We propose using a transition matrix and income loss matrix, and establish a mobility dominance criterion to compare alternate tax-benefit systems. We illustrate with data from Brazil.

Keywords: stochastic dominance, poverty, fiscal incidence, mobility

JEL Classification: I32, H22