Rethinking fiscal policy and its impacts on women

Governments use fiscal policy to stimulate economic growth, redistribute, and fund essential public services. However, the design of tax and benefit policies can affect women and men differently—especially in developing economies where informal labor markets dominate and households rely on social transfers. When policies limit women’s incentives to fully participate in the economy, this not only affects their welfare but also leads to lower overall economic growth.

A new approach examines this dimension of fiscal policies by focusing on the composition of different types of households. Understanding how fiscal policies affect men and women differently is challenging due to limited data on how tax burdens and transfers are distributed within households. This approach recognizes that households’ demographic and economic characteristics can influence women’s labor force participation and caregiving responsibilities as well as the taxes they pay and the benefits they receive. 

Figure 1. Pre-fiscal and post-fiscal poverty rates by demographic household type

Source: Buitrago Hernandez et al, forthcoming. 

Note: Headcount poverty rate using national poverty line.

Targeted fiscal policy can improve outcomes

Social transfers are one of the most powerful fiscal tools for reducing poverty, especially among women. When designed effectively, they help low-income individuals and caregivers and provide financial stability for vulnerable people. However, many transfer systems fail to reach the people who need them most. For example, in Viet Nam, households where women face the greatest time constraints due to caregiving responsibilities see fewer benefits from direct transfers. (See reference 1 below). In El Salvador, women-led households are more likely to remain in poverty even after receiving government transfers, suggesting that increased coverage and better targeting could improve outcomes.

In Peru, while direct transfers help reduce poverty, especially for single mothers with dependents, these positive effects are often offset by regressive indirect taxes (figure 1) (see reference 2 below). Though value-added tax (VAT) and sales taxes are designed to be neutral because everyone pays the same rate, they can place a greater burden on women-led households, which are often poorer and spend a larger share of their income on consumption. Transfers for the poor and vulnerable that are more effective in coverage, adequacy, and targeting could compensate for the tax burden they face.

Structural inequalities, left unaddressed, are amplified by fiscal policies

Personal income tax (PIT) is typically designed to be progressive, with higher earners paying a higher share of their income in taxes. While this is equitable in principle, different policy design features can discourage women’s participation in the work force and reinforce income gaps between women and men. 

For example, in Armenia, which uses a flat PIT rate, dual-earner households pay the highest share of their income in taxes while benefiting the least from direct transfers, which may act as an implicit disincentive for women to participate in the formal labor force. The gap is consistently higher for households with dependents, as caregiving responsibilities constrain women’s job opportunities. 

Figure 2. Incidence of Direct Fiscal Policies by Selected Household Types 

Source: Montanes, Tuzman and Rodriguez-Chamussy, forthcoming.

Note: Headcount poverty rate using national poverty line.

Even seemingly positive results require careful interpretation. In Uruguay, single-parent households headed by women bear lower tax burdens than dual-earner households (figure 2)—but this partly reflects their overrepresentation in informal jobs and reliance on non-taxable income, such as alimony. (See reference 3 below). [1] This also means that they contribute less to social security and receive fewer retirement benefits, perpetuating inequality over the life cycle.

Energy subsidies are frequently used to support households in many developing countries through lower energy prices. However, a large share of benefits from these subsidies do not flow to low-income households. In Guinea, women-led households are less likely to benefit from electricity subsidies simply because they are less connected to the electricity grid. (See reference 4 below). 

Moving forward: What can be done?

The fiscal system shapes household decisions about work, caregiving responsibilities, and internal dynamics, far beyond its direct impacts. As governments seek to boost economic growth, they must also address structural gaps. Fiscal policy can become more effective by considering how taxes and transfers affect households differently depending on their composition and how its design affects incentives. An economy that enables women’s full participation requires a tax and benefit system that works for everyone—which would also contribute to stronger, more sustainable economic growth.

The authors gratefully acknowledge the donors of the Umbrella Facility for Poverty and Equity for providing financial support to pilot and scale this initiative.

References

1. Rodriguez and Wai-Poi. Fiscal Policy and Equity in Viet Nam 2018-2022. Building blocks for a more equitable fiscal system. Working paper. Forthcoming.
2. Buitrago Hernandez, de la Flor, Rivera and Rubiano-Matulevich. Unequal Burdens, Uneven Benefits: Applying a Gender Lens to the Analysis of Peru’s Fiscal System. Working paper. Forthcoming. 
3. Rodriguez Chamussy, Tuzman and Llovet. “Incidence analysis of direct fiscal interventions on gender-relevant typology of households in Uruguay”. Working paper. Forthcoming.
4. Ouedraogo, Coulibaly, Koné and Koné. Assessing the Impact of Fiscal Policy on Gender Disparities in Guinea. Working paper. Forthcoming.