Whom Is It Fair to Subsidise?: Evidence from Argentina

Abstract

The inequality literature has shown a broad interest in examining how a subsidy or tax credit towards a certain point in the income distribution affects inequality. In this article, we answer the question: whom is it fair to subsidize? We adopt the benchmark income as the criterion of fairness: a subsidy or tax credit will be fair if it contributes to reducing income inequality. This benchmark income allows us to identify the richest (poorest) person who, by receiving a subsidy, leads to a reduction (increase) in inequality. The estimates are based on the Gini coefficient as a measure of inequality. We provide an application for the case of Argentina and its regions (2016–2020). The primary source of information is microdata from the Permanent Household Survey (EPH). The results show that the benchmark income has remained relatively stable between the 71th and 73th percentiles of the per capita income distribution—for the latest period examined (Q3-2020), this implies an income of AR$23,100. This result implies that subsidizing people with incomes above the 73th percentile is unfair since it would increase inequality. Therefore, the benchmark income can be considered an objective and intuitive criterion to determine the convenience of a subsidy or tax credit by policymakers globally.