By IMFBlog

May 15, 2017

Version in Français (French)

One need look no further than the national motto—liberté, égalité, fraternité—to understand that equality is an especially important concept in France. French policies play an important role in combating inequality. This is primarily achieved through a combination of minimum wage policies and an extensive tax and transfer system.

But these traditional equality-enhancing policies may have reached their limits as unemployment has become entrenched and budgets have been severely stretched. So, what are the best policies for a country weighing how to boost growth, lessen inequality, and minimize costs? It is not a zero sum game.

Our Chart of the Week is from an IMF working paper that explores the impact of different policies on efficiency and inequality, while considering budgetary constraints in France.

As the bottom right quadrant illustrates, a reduction of the taxes paid on low-skilled workers’ employment (which include payroll taxes and social security contributions) improves output and reduces inequality. This is a win-win strategy that has been a policy of choice for successive French governments. And, as the working paper explains, the chart helps identify which policy combinations can result in win-win strategies that are also budget-neutral.

Changes in tax and spending policies can stimulate output in a number of ways. In the upper right quadrant, representing higher output but increased inequality, you see tax cuts allow employment and investment to rise. But cuts to the capital income tax and to the personal income taxes tend to worsen inequality, since capital income is unevenly distributed and these taxes are progressive. In the lower left quadrant, you see that an increase in public employment reduces inequality but also reduces output, as in France it is found to crowd out private employment.

When governments understand better how different policies affect equality and how they can be combined in self-financing packages, they can make the best choices for win-win strategies.