The impact of fiscal policies on the poorest: a critical analysis

In recent years, a narrative has been developing that suggests the idea that the poor are the first to be considered in fiscal policies. However, a recent study reveals surprising results: the poor seem to be the most affected by tax burdens, resulting in an increase in their impoverishment or a decrease in the purchasing power of those with low incomes after fiscal intervention. This new perspective is based on the notion of fiscal incidence, a concept that has been analyzed for decades by institutions such as the World Bank. This approach seeks to understand how fiscal systems impact the population as a whole, and particularly the economically vulnerable. In the case of Mexico, the government conducts analyses of the incidence of taxes and spending through the National Income and Expenditure Survey of Households (ENIGH) by Inegi. However, there is a gap in calculating synthetic poverty indices, which involve not only analyzing the effects of direct taxes and cash transfers, but also evaluating the influence of indirect taxes and subsidies on the consumable income of the population. John Scott, advisor and academic researcher at Coneval, and Nora Lustig, director of the Commitment to Equity Institute at Tulane University, are two experts who have addressed this issue decisively. Both agree that the tax system in many cases is impoverishing the most disadvantaged, generating a post-fiscal effect that increases total poverty instead of mitigating it. Before delving into the results of this study, it is important to understand the different income levels experienced by people in poverty before, during, and after fiscal interventions. Market income, without considering taxes or transfers, is the starting point. Then, net market income, which already includes direct taxes, shows a slight increase in extreme poverty due to the deduction of direct taxes on income. Gross income, which adds cash transfers to this net income, manages to reduce poverty reaching the poorest strata of the population. However, it is consumable income, which considers indirect taxes and subsidies, where the greatest negative impacts for the poorest are observed. Indirect taxes, such as those on consumption, can reverse the positive effects of direct transfers, resulting in a net impoverishment for this population. In this context, it is crucial to rethink the targeting of resources towards the poor population, as suggested by Nora Lustig. It is also necessary to introduce evidence-based rationality to evaluate the effectiveness of social programs and adjust them accordingly, as mentioned by John Scott. This implies strengthening indirect taxes to increase revenue, but also redirecting these resources towards a universal social protection system that truly benefits the most disadvantaged. Regarding future policies, the message is clear: the next government has a historic opportunity to reform the tax system to increase revenue and tax progressivity, while prioritizing spending on eradicating extreme poverty and providing quality public services. Only through an inclusive and equitable approach can progress be made towards building a strong welfare state that guarantees dignified living conditions for the entire population. In conclusion, it is essential that fiscal and budgetary decisions be directed towards reducing inequality and protecting the most vulnerable. Only in this way can true social and economic progress be achieved that benefits the entire Mexican society.