Two other relevant differences make the structure of social spending in Latin America more similar to the one of the United States than to the one of the United Kingdom. First, despite recent positive trends from large scale programs such as _Oportunidades_ in Mexico or _Bolsa Escola_ in Brazil, in Latin America cash transfers as a mean to transfer funds to the poor still represent a low proportion of social spending. While in the United Kingdom per capita cash transfers to the poorest income quintile amount to 6.9 percent of GDP per capita, the average in our Latin American sample equals less than one percent, with the country spending the most – Mexico – transferring only 1.1 percent to the poor.<sup>6</sup> Thus, under this aspect as well the structure of social spending is more similar to the one of the United States (where cash transfers to the poorest income quintile amount to one percent of GDP per capita), than to the one of the European welfare states.

Second, Latin American countries rely much more on subsidies – such as gas or food subsidies – than the United Kingdom. Indeed, most of social spending that we denote as “Other Transfers” in Figure 4 consists of subsidies. In our Latin American sample, this type of social spending averages 1.9 percent of GDP, a similar amount than in the United States, and four times more than in the United Kingdom. In addition to the obvious distortions that subsidies create, Figure 4 clearly shows that cash transfers can be more easily targeted to the poorest income quintile than subsidies, which tend to benefit equally the whole population – or, in case of gas subsidies, even to disproportionately benefit the richest income quintiles.

# **4.2 TAXATION**

A comprehensive analysis of pro-poor spending behavior also ought to look at taxation, as if each individual would receive back from the government the exact amount that it has contributed, there would be _de facto_ no redistribution. In this section we analyze therefore how much each income quintile contributes to total taxes collected by the government: in the next section we shall then look jointly at the structure of social spending and taxation.

We divide taxation into three categories: income taxes, value-added taxes, and all other types of taxes, which include property taxes, import taxes, and specific taxes such as contributions to public health systems, and taxes on vehicles (for more details, see the Appendix). Notice that, by adjusting taxation to National Accounts data, we do estimate (with some margin of error) what the income quintiles _de facto_ contribute to total taxation. In particular, adjusting to National Accounts is likely to reduce the bias caused by two important factors: _informality_ and _tax evasion_ . As in Latin America the richest income quintile pays on average 82 percent of total income taxes, most tax evasion is

> 6 Unfortunately, we were not able to include all cash transfers programs in Latin America: for instance, programs such as _Familias en Acción_ in Colombia, or the _Red de Protección Social_ in Nicaragua, have not been considered because the household surveys in these countries did not allow the identification of the beneficiaries of these programs. However, considering that these programs are much smaller in magnitude than _Oportunidades_ in Mexico or _Bolsa Escola_ in Brazil, it is likely that they would not change the fact that cash transfers to the poor remain much higher in the United Kingdom.

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