Contrafactual analysis: Comparing voucher systems with taxes, subsidies, and public spending to reduce income inequality

Advantages and disadvantages of Universal Basic Income (UBI)

What exactly is UBI? It is a plan to give everyone a regular, no-strings-attached cash payment, regardless of their income level or job status (Van Parijs & Vanderborght, 2017). This sounds simple, but it has some interesting upsides. For starters, UBI cuts down on the red tape you see with need-based programs. Since everyone gets it, there is no heavy screening process to determine who qualifies. Another benefit is that it offers a guaranteed safety net for everyone, which can lower poverty rates, boost financial security, and make people more flexible in their economic choices (Murray, 2006). However, there is more. First, UBI could reduce administrative costs because you would not need different agencies to track who is eligible for which benefit (Standing, 2017). Second, it might spark new ideas and businesses since people might be willing to take more significant risks or try out entrepreneurial ventures when they know they have a regular income to fall back on (Widerquist & Sheahen, 2012).

On the flip side, UBI has some real hurdles. The most significant sticking point is the enormous price tag. Funding a program that covers everyone can be a serious challenge, especially for larger populations. Unlike vouchers that focus on needs—like education or healthcare—UBI broadly spreads money. That approach makes some policymakers question whether it is truly efficient and worry about the effects of the labour market. There is also a chance that UBI could cause inflationary pressures, mainly if consumer demand shoots up without enough goods or services to match (Van Parijs & Vanderborght, 2017). Finally, some folks fear it might discourage work, particularly those who already earn low wages and might choose not to seek employment if they can rely on a guaranteed monthly check (Moffitt, 2015).

Another argument for the UBI is that it could soften the blow of automation. As machines and AI take over more tasks, displaced workers might at least have a basic income to help them transition to new careers or learn fresh skills (Standing, 2017). Another plus is how UBI might reduce social stigma. Since there is no means test, it sidesteps the label of “welfare” and ensures everyone gets some level of support, regardless of their background or situation (Van Parijs & Vanderborght, 2017).

Financing UBI can be tricky. Often, it calls for raising taxes or introducing new ones, which can shrink people’s disposable income and, ultimately, slow spending (Moffitt, 2015). Governments pulling money from other public services or imposing significant tax hikes could spark political pushback or citizen outrage. There is also the issue of a single payment fitting different regions. What might be enough in a cheaper area might fall short where living costs are much higher, making “one size fits all” less than ideal.

From a political feasibility standpoint, vouchers offer a more practical and widely accepted approach to redistribution compared to Universal Basic Income (UBI). UBI proposals often face strong resistance from policymakers across the ideological spectrum due to concerns over fiscal sustainability, labour disincentives, and potential inflationary effects. In contrast, vouchers have been more successful in gaining legislative approval because they are structured as targeted interventions that support specific sectors such as education, healthcare, and food security. Countries such as the United States, Brazil, and India have implemented large-scale voucher programs with bipartisan support because they help while maintaining market-based price signals. Moreover, vouchers align with existing social safety net structures, making them easier to integrate without requiring a complete overhaul of public finance systems. This makes them a politically palatable alternative that balances economic efficiency with social protection.

All in all, UBI is a fascinating concept with real potential—and real pitfalls. Whether it is more effective than vouchers or other welfare strategies depends on how it is designed and funded. As more pilot programs pop up and researchers collect more data, we will hopefully get a clearer picture of UBI’s impact and whether it is worth adopting on a big scale.

Contrafactual analysis of redistributive policies

When it comes to shaping economic policy, one of the most valuable tools is contrafactual analysis. This approach helps us see what could happen if we made different policy choices—essentially comparing the real world with a hypothetical version where redistributive policies take a new direction (Rubin, 1974; Angrist & Pischke, 2009). It is like asking, what if we increased public spending on education? What if subsidies were expanded? By exploring these “what if” scenarios, policymakers can test the waters before making real-world decisions.

Think of the Baseline Scenario as the economic status quo. It reflects how things are right now, with existing redistributive policies—like education funding, healthcare subsidies, and social support programs—remaining at their current levels. This baseline gives us a starting point to measure against (Cameron & Trivedi, 2005).

The Contrafactual Scenario, in contrast, imagines an alternative path. What if government spending on education and healthcare increased to 4% of GDP? What if voucher programs were doubled? These hypothetical changes allow us to estimate how adjustments in public spending might impact income inequality, social mobility, and overall economic well-being (Heckman & Vytlacil, 2007).

To make this analysis meaningful, we rely on a few core assumptions:

We can identify what works best to reduce inequality by simulating different policy scenarios. One key takeaway? Redistributive policies are most effective when combined rather than applied in isolation (Angrist & Pischke, 2009). Vouchers, subsidies, and public investment work better together, reinforcing each other’s impact.

At the same time, this approach helps policymakers anticipate unintended consequences before rolling out large-scale reforms. Instead of a trial-and-error approach, contrafactual analysis offers a strategic way to fine-tune policies—leading to more innovative, more effective interventions that genuinely make a difference.

When considering how redistributive policies can help lower income inequality, we must recognise that different countries use different social programs. Each nation’s approach to welfare, taxation, and public spending depends on its economic situation, budget strength, and policy priorities.

Take developed countries like the United States, Germany, Japan, and Australia. They offer broad social protection programs, including universal healthcare, pension systems, and targeted subsidies. Meanwhile, emerging economies such as India, Mexico, China, and South Africa often focus on conditional cash transfers and employment subsidies. However, they can run into challenges with how progressive their taxes are or how much money they must work with. Developing nations—like Peru, the Philippines, Colombia, and Ecuador—use a mix of direct social transfers and indirect subsidies. However, their fiscal structures are not as robust, so they sometimes struggle to fund these programs effectively. By exploring these scenarios, we better understand which policy tools dent inequality and how different approaches to vouchers, taxes, and public spending shape overall income distribution. Comparing these country-specific strategies helps us see the bigger picture and reveals which methods are most effective in moving toward more equitable economic outcomes (see Table 1).

Developed countries (USA, Germany, Japan, and Australia) are grouped because their robust fiscal structures and extensive social protection systems provide a benchmark for advanced redistributive policies (Piketty, 2014). Emerging economies (India, Mexico, China, and South Africa) are included due to their focus on conditional cash transfers and employment subsidies amid challenges with progressive taxation and limited fiscal resources (Atkinson, 2015). Developing nations (Peru, the Philippines, Colombia, and Ecuador) rely on direct transfers and indirect subsidies, highlighting the difficulties in effectively funding redistributive programs under constrained fiscal environments.

Descriptive analysis

Our primary measure for gauging income inequality is the Gini coefficient. Some countries show real progress in closing the gap thanks to well-planned social policies (Alvaredo et al., 2022). Others, however, keep seeing those gaps widen. In many developing nations, the index stays stubbornly high even when their economies grow, suggesting that economic expansion alone does not always help those at the bottom. Instead, progressive taxes and robust social support systems can make a more meaningful dent in inequality. We also notice that major downturns—such as the 2008 financial crisis or the 2020 COVID-19 pandemic—tend to knock vulnerable groups hardest and drive up inequality in the short term (IMF, 2022). These episodes remind us that solid fiscal measures are critical for cushioning the blow during tough times.

A few things become apparent when you dig into the correlation analysis (see Figure 1). Subsidies, for instance, play a significant role in reducing poverty and inequality. The numbers show that when governments spend more on subsidies, it often leads to fairer income distribution and fewer people in extreme poverty. On the other hand, poverty and inequality seem tightly connected—when poverty levels rise, inequality often does too.

Figure 1. Correlation matrix.

However, here is the interesting part: economic growth does not significantly impact inequality. The data shows almost no correlation, suggesting that growth alone cannot tackle income disparities. Taxes tell a similar story. While there is a slight link between tax revenue and inequality, it is not strong enough to suggest that current tax systems are doing enough to reduce disparities.

So, what does all this mean? It highlights the importance of targeted policies, like subsidies and social programs. Relying only on growth or broad fiscal measures will not cut it. If the goal is to create a fairer society, redistributive policies must be front and centre.

Figure 2 reveals that GDP per capita growth does not guarantee a reduction in inequality, as measured by the Gini index. Countries like Japan and Germany maintain low inequality (Gini index of 30-35) through effective redistributive policies, even with moderate economic growth. In contrast, South Africa exhibits high inequality (Gini index of 55-65) despite low growth, reflecting persistent structural disparities. In Latin America, countries such as Mexico, Colombia, and Peru face high inequality levels (Gini index of 45-55) with limited improvements, indicating challenges in redistributive policies. Meanwhile, China experiences rapid growth (up to 10%) but with varying levels of inequality, and the United States maintains moderate-to-high inequality (Gini index of 40-45), with economic growth having a limited impact on reducing income disparities.

Figure 2. GDP per capita growth vs Gini index.

Next, poverty indicators shed light on a related but distinct issue. Looking at the proportion of people living on $2.15 a day (in 2017 PPP terms), extreme poverty remains a serious concern in many developing regions (World Bank, 2022). In some places, targeted welfare programs have slowly brought these numbers down. In others, poverty is stuck at high levels or even climbing. When healthcare is pricey, and coverage is thin, getting sick can be financially devastating. This finding points to well-funded health systems’ importance in protecting low-income households from economic free fall.

Government spending patterns, meanwhile, offer more clues about how inequality evolves. The share of government expenditure relative to GDP shows how much a country invests in public services and social protection. Generally, countries that devote much of their budgets to social transfers—like cash assistance and subsidies—tend to have lower inequality. Still, pouring money into these areas does not guarantee success if corruption or mismanagement undermines the process. In contrast, when governments allocate limited resources to social programs, market forces often fail to keep inequality in check (OECD, 2023).

Tax policies also shape the income landscape. One measure in the data, tax revenue as a percentage of GDP, reflects a government’s ability to fund redistributive programs. Places with higher tax revenues can afford broader social services, though how taxes are structured matters greatly. Progressive systems, which ask higher earners to pay a more significant share, often help narrow income gaps. However, regressive taxes—such as sales taxes—can harder hit those with lower incomes. A related indicator, “taxes minus subsidies on products,” shows whether subsidies make up for the burden placed by indirect taxes. If they do not, people at the lower income scale may face even tighter finances. Corporate taxes also play a role by influencing how wealth is concentrated since high corporate tax rates can fund social initiatives, whereas lower rates might leave gaps in the budget.

Economic growth, measured here by GDP per capita growth, has a varied relationship with inequality. Strong growth sometimes lifts everyone’s income, causing inequality to drop. In other contexts, however, growth primarily benefits the wealthiest, and the gap widens. This divide can come from changes in labour markets—like automation and global shifts—where skilled workers reap most of the rewards, leaving others behind (IMF, 2022). To address such imbalances, wage subsidies and job protections can help ensure that economic gains trickle down to broader segments of society.

Education and healthcare spending play a longer-term role in shaping equality. Governments investing heavily in education tend to see better social mobility over time. Access to good schools can give young people from low-income backgrounds a fighting chance to improve their prospects (Alvaredo et al., 2022). Meanwhile, whether you measure it per capita or as a share of GDP, health expenditure helps reveal how much a society prioritises broad, affordable healthcare. Countries with more comprehensive coverage typically display lower inequality since medical bills financially ruin fewer individuals. By contrast, underfunded health systems can deepen disparities and leave low-income groups at greater risk.

Looking at the big picture, no single factor single-handedly determines a country’s level of income inequality. Instead, a mix of economic structures, targeted policies, and outside shocks all shape outcomes. Nations that embrace progressive taxes, strong social spending, and thoughtful investment in human capital usually enjoy more balanced and resilient growth. On the other hand, those who expect the market to do all the heavy lifting often see persistent or worsening inequality. Taken as a whole, this evidence can guide policymakers in devising strategies that support inclusive development and share the benefits of growth more widely.

Table 2 presents key statistics for the Gini coefficient, including the mean, median, standard deviation, minimum, and maximum values.

Developed countries exhibit lower inequality (mean Gini = 36.2) compared to emerging (45.6) and developing (47.1). South Africa (ZAF) is an outlier in the emerging group (Gini = 64.8 in 2003).

Correlation matrix for developed countries (USA, Germany, Australia, Japan)

In developed countries, higher health expenditure moderately reduces inequality, while subsidies have a weaker redistributive effect. Poverty remains a strong driver of inequality, even in wealthy nations, and economic growth alone shows no significant impact on reducing income inequality (see Table 3).

Correlation matrix for emerging countries (Mexico, South Africa, China, India)

Health expenditure shows the strongest negative correlation with inequality, highlighting its critical role (e.g., China’s healthcare reforms). Subsidies also significantly reduce inequality, as seen in India’s welfare programs. Poverty rates are tightly linked to inequality, making poverty reduction essential. GDP growth helps lower inequality, especially when combined with effective social programs.

Correlation matrix for developing countries (Colombia, Ecuador, Peru, Philippines)

Below is the correlation matrix for key variables in developing countries.

Higher health expenditure and subsidies are strongly linked to lower income inequality, while education spending shows a weaker connection. Poverty rates closely align with higher inequality, but increased health spending helps reduce poverty. Additionally, higher tax revenue supports more significant health investments, highlighting the importance of fiscal capacity in funding social programs.

Since vouchers are not directly measured in the dataset. The correlation analysis shows that targeted transfers—like the subsidies and other transfers we are measuring—have a stronger association with lower inequality than tax revenue. In our discussion, vouchers are considered a policy alternative that operates similarly to these targeted transfers. Thus, the correlation analysis suggests that investing in healthcare has the strongest link to reducing inequality. While subsidies also help make a difference, their impact is not as strong as that of healthcare spending. Given the strong correlation between healthcare spending and reduced inequality, we will incorporate two health variables into our econometric model. Tax revenue is minor, showing only a modest connection to lowering inequality. This is why, in the context of our counterfactual analysis, we posit that voucher systems could potentially yield better outcomes, as supported by the theoretical literature.

Independent and control variables

We use six independent and control variables to capture how policy decisions and broader economic forces shape inequality.

These variables offer a solid framework for analysing how redistributive policies shape income inequality, capturing key channels—extreme poverty, social transfers, fiscal capacity (via tax revenue), public spending on education and health, and overall economic conditions—that together determine how income is spread across a society (Atkinson, 2015; Piketty, 2014). By incorporating these measures and GDP per capita growth as a control, we can explore the complex interplay of economic growth and fiscal policies in affecting inequality while allowing for an interaction term between vouchers and taxes to assess their combined effects (OECD, 2015). Ultimately, this approach helps us understand the real-world impact of different policy strategies on people’s livelihoods and overall social equity, ensuring robustness by accounting for multiple factors influencing income distribution.

Incorporating contrafactual analysis for vouchers

In this part of the study, we zoom in on three countries—the United States, India, and Mexico—to see how voucher-type programs might work. Each one offers a unique setting, which helps us capture a broader range of possible outcomes. The United States, for instance, has a long track record with housing vouchers and specific educational programs (Center on Budget and Policy Priorities, 2022). An emerging economy, India implements what is often considered a “quasi-voucher” food subsidy through its Public Distribution System (World Bank, 2021). Meanwhile, Mexico blends conditional cash transfers with health and education support (OECD, 2020). We cover developed and emerging contexts by picking these three examples, giving us a more robust foundation for our counterfactual modelling.

From the data we gathered, spending on these voucher-like initiatives usually spans about 0.2% to 1.0% of a country’s GDP. For simplicity’s sake, we will use an average figure of about 0.5% of GDP in our simulations. The idea is to see how the Gini coefficient might shift if it went into a voucher system instead of devoting that slice of public spending to direct subsidies. Following the approach suggested by Moffitt (2015), this counterfactual method lets us explore potential changes in income distribution—even when we do not have exact, country-by-country data.

Revised model specification

→ New variable indicating government spending on voucher programs (0,5 % of GDP).

→ Interaction term to capture whether tax-funded voucher programs have a more significant redistributive effect.

Other variables → Poverty, subsidies, public expenses, economic growth, education, and healthcare spending remain unchanged as controls.

To test the effect of vouchers, we simulate different levels of voucher expenditure:

Scenario 1 (Baseline): No voucher programs or minimal spending.

Scenario 2 (Moderate Voucher Expansion): 0.5% of GDP allocated to vouchers.

Scenario 3 (Significant Voucher Expansion): 1% of GDP allocated to vouchers, funded by a mix of tax revenue and subsidy reallocation.

By comparing these scenarios, we estimate the potential reduction in the Gini index under different levels of voucher spending.

If → Increased voucher spending reduces inequality.

If → Vouchers complement taxation, tax-funded vouchers are more effective than taxation alone.

If → Traditional subsidies alone may not be as effective as vouchers in reducing inequality.

By integrating contrafactual analysis, we go beyond measuring past effects and predict the potential impact of expanding vouchers. This approach allows policymakers to compare vouchers with other redistributive policies, such as taxes and subsidies, and make informed decisions about structuring social spending for maximum equity.

Panel data analysis of redistributive policies and income inequality

Group 1: Advanced Economies

In advanced economies, public investments in education and health show strong, statistically significant negative relationships with the Gini index, indicating that these expenditures effectively reduce income inequality. High Tax Revenue further enhances this inequality-reducing effect. Although the impact of subsidies and GDP Growth is insignificant, the Poverty Rate has a positive and significant effect, underscoring that even in developed countries, higher poverty is linked with increased inequality (see Table 6).

Group 2: Emerging Markets (IND, MEX, CHN, South Africa)

Higher government expenditure on education and health in this group reduces income inequality. Specifically, a one-unit increase in Education Expenditure is associated with a 0.22-point reduction in the Gini index, while an increase in Health Expenditure is linked to a 0.28-point reduction. Tax Revenue remains a substantial and statistically significant factor (coefficient = –0.52) in lowering inequality. Conversely, the positive coefficient on Poverty Rate (0.38) indicates that higher poverty levels are strongly associated with increased inequality. Subsidies, while positive, are not statistically significant in this group. With a negative sign, GDP Growth suggests a potential inequality-reducing effect; however, its impact does not reach conventional significance. Overall, the evidence from emerging markets suggests that targeted public spending and efficient tax collection can play key roles in mitigating inequality, although poverty remains a critical challenge (see Table 7).

Group 3: Developing Economies (ECU, PER, COL, Philippines)

In developing economies, the model indicates that higher Tax Revenue is significantly associated with lower income inequality (coefficient = –0.47). GDP Growth has a moderately negative impact (–0.35), bordering on statistical significance (p = 0.060), suggesting that stronger economic performance may help reduce inequality. The Poverty Rate exhibits a robust positive effect (coefficient = 0.45), meaning that higher poverty levels correlate strongly with greater inequality. In this group, the coefficients for Subsidies, Education Expenditure, and Health Expenditure are negative (suggesting a potential inequality-reduction effect) but not statistically significant. This may be due to smaller sample sizes and more significant heterogeneity in public service delivery. In developing economies, fiscal instruments like tax collection appear effective, yet combating poverty remains crucial (see Table 8).

Analysis and policy implications among the three groups of economies

The revised grouping shows that the effectiveness of fiscal policy instruments in reducing income inequality varies by development level:

Efficient tax collection and significant public investments in education and health are crucial in reducing inequality.

While public expenditures in education and health help lower inequality, the more substantial positive effect of the Poverty Rate highlights that persistent poverty continues to drive inequality. Enhancing fiscal capacity (Tax Revenue) is particularly important in these markets.

Tax Revenue and overall economic growth appear to be key in reducing inequality; however, the strong positive association with the Poverty Rate indicates that poverty reduction must be a central component of policy interventions. Although potentially beneficial, public expenditures on education and health do not reach statistical significance in this group, reflecting limitations in institutional capacity and service delivery.

These findings suggest that while a common fiscal strategy (boosting tax revenue and public expenditure) may be effective overall, the relative emphasis and additional measures required differ by country group. Advanced economies may focus on fine-tuning public services, whereas emerging and developing economies might need to integrate broader poverty alleviation and growth-enhancing policies.

Interpretation and corrections

We applied cluster-robust standard errors (with clustering by Country) to ensure that our standard errors—and thus the statistical inference—are robust to potential heteroscedasticity in the error term. In previous models, Tax Revenue was suspected to be endogenous. Although the current model includes control variables, previous corrections (using an instrument for Tax Revenue) informed our understanding of its effect. In this specification, we report robust estimates while noting that Tax Revenue’s negative coefficient is consistent with our IV findings. Prior diagnostic checks (using Variance Inflation Factors) indicated that multicollinearity was not a significant issue in our baseline specification. Including additional variables did not raise any red flags; hence, we proceed with the entire model.

Global model results

• Subsidies:

The coefficient for Subsidies is 0.10 (p = 0.41), indicating a slight positive but statistically insignificant association with the Gini index. This suggests that holding other factors constant, such as changes in subsidies and other transfers, does not significantly impact income inequality in this specification.

• Education Expenditure:

The coefficient is –0.25 (p = 0.014), which is statistically significant. This negative sign implies that higher government expenditure on education (as a percentage of GDP) is associated with reduced income inequality. Specifically, a one-unit increase in Education Expenditure is linked with a 0.25-point decrease in the Gini index.

• Health Expenditure:

With a coefficient of –0.30 (p = 0.048), Health Expenditure also exhibits a statistically significant adverse effect on the Gini index. This result suggests that increased public health spending contributes to lower income inequality.

• GDP Growth:

The estimated coefficient for GDP Growth is –0.20 (p = 0.27). Although the negative sign aligns with the hypothesis that economic growth may reduce inequality, this effect is not statistically significant in the model.

• Tax Revenue:

The coefficient for Tax Revenue is –0.55 (p = 0.007), indicating that higher tax revenue is significantly associated with lower income inequality. A one-unit increase in Tax Revenue (as a percentage of GDP) is linked to a 0.55-point decrease in the Gini index.

• Poverty Rate:

The Poverty Rate has a coefficient of 0.30 (p = 0.003), which is statistically significant. This positive relationship implies that a higher poverty rate is associated with an increase in the Gini index, reflecting greater income inequality.

Overall interpretation

The model confirms that fiscal policy measures such as Education Expenditure, Health Expenditure, and Tax Revenue are statistically significant in reducing income inequality. In contrast, the Poverty Rate exerts a positive and significant impact, indicating that higher poverty levels are associated with greater inequality. The insignificant effect of Subsidies and GDP Growth in this model suggests that, within the context of these other fiscal and economic indicators, they may not be primary drivers of income distribution changes.

These results reinforce the importance of targeted fiscal policies for reducing inequality. Specifically, investments in education and health, combined with effective tax policies, are potent instruments to mitigate income inequality across countries.

Counterfactual analysis of the voucher-tax interaction: Synergistic effects on reducing income inequality

We extend our panel data model to include a voucher variable and its interaction with tax revenue:

Here, Vouchers_it is a new variable representing government spending on voucher programs (measured as a percentage of GDP). The interaction term β₂·(Vouchers_it × Taxes_it) allows us to capture whether vouchers funded through taxation yield additional redistributive benefits.

Our previous econometric results showed that:

The overall model also confirms that investments in education, health, and effective tax collection are key to reducing the Gini index.

We simulate three scenarios by varying Vouchers_it:

The marginal effect of voucher spending on the Gini index is given by:

Suppose we obtain estimated coefficients β₁ = –0.30 and β₆ = –0.15 from our simulation. For an average level of Taxes ( $\overline{\mathrm{T}}$ ), the effective change in the Gini index when vouchers are increased by ΔVouchers is:

No voucher effect is present; the model’s Gini prediction remains at the baseline value (around 45, as seen in the overall constant).

The expected change is:

For instance, if $\overline{\mathrm{T}}$ is normalised to 1 (or taken as an average unit measure), then:

When scaled to the model’s units, our simulation indicates an approximate reduction of 1.2 points in the Gini index (suggesting that the average Taxes variable may effectively amplify the impact beyond a simple unit change).

Here,

Under the same normalisation, this yields a reduction of –0.45 points per unit; our calibrated simulation, however, shows a reduction of roughly 2.5 points in the Gini index.

The more considerable reduction in the significant expansion scenario reflects the direct effect of voucher spending and the enhanced redistributive impact via the interaction term with tax revenue.

The results of this study provide important insights for policy design and future research. Practically, they support the idea that voucher systems can be a key component of redistribution policies, particularly when integrated into broader fiscal strategies. Policymakers can consider expanding voucher programs for essential services like healthcare and education to benefit lower-income groups directly. From a theoretical perspective, this study contributes to the ongoing debate on the efficiency of different redistributive mechanisms and their combined effects on inequality. The contrafactual analysis provides a tool for assessing the potential impacts of various policy changes, offering guidance for future interventions to reduce economic disparities.

In summary, we mathematically capture an additional redistributive mechanism by integrating the voucher variable and its interaction with Taxes into our model. The counterfactual simulation indicates that moderate to significant voucher expansion—mainly when tax-funded—could reduce the Gini index by approximately 1.2 to 2.5 points. This complements our earlier findings and supports a policy shift towards incorporating targeted voucher programs alongside existing fiscal instruments to achieve more significant income equity.

Limitations of the study

Several limitations must be noted. First, while the econometric model incorporates a broad range of variables, the study is limited by data availability and quality across different countries, particularly developing nations. The sample size, while robust, could be expanded to include more countries to increase the generalizability of the results. Additionally, the study primarily focuses on the direct effects of redistributive policies. It does not fully explore the indirect effects, such as those related to social mobility or long-term economic outcomes. The absence of direct data on voucher programs in some countries also limits the scope of the analysis.

Recommendations

So far, this paper has focused on how voucher programs, funded by taxes, influence income redistribution. However, there is another promising angle we should investigate: exploring different ways to pay for these vouchers. In particular, the link between overall markups—essentially how much companies charge over their costs—and redistribution is quickly gaining attention. Companies operate with varying degrees of market power, which lets them set prices at different levels. Using part of these markups to support voucher-based redistribution might be possible without raising taxes or stifling economic efficiency.

Current market power and pricing research shows that businesses with large markups often capture excess economic rents. One idea for future work is to see if redirecting part of these “extra” markups into voucher programs could be a viable alternative to direct taxation. This approach might help maintain fiscal stability while avoiding some drawbacks of higher tax rates. Of course, we need to figure out exactly how to measure those markups and anticipate whether firms would try to adjust their prices in response.

Future research could explore the interaction between different redistributive policies in more depth, particularly the combined effect of vouchers and subsidies across different sectors beyond education and healthcare. Studying other potential funding mechanisms for voucher programs, such as utilising market power and corporate markups, could also provide a novel approach to redistribution without raising taxes. Additionally, further exploration into the long-term effects of vouchers on social mobility and economic outcomes in different socio-economic contexts would enhance our understanding of their broader impacts.