ITUC report: Fair financing of social protection through progressive taxation maximises returns

A new report for the International Trade Union Confederation (ITUC) examining the effects of financing social protection has found that progressive taxation produces the highest returns.

Building on previous ITUC research, Investments in social protection and their impact on economic growth: tax financing options shows the economic benefits of social protection by examining the different financing options that states have at their disposal in order to strengthen and extend their social protection systems.

The study simulated the effects of different tax-financing scenarios for social protection on household income, employment and overall GDP. The analysis was carried out in Bangladesh, Colombia, Costa Rica, Georgia, Ghana, India, Rwanda and Serbia.

The report found that financing social protection through progressive forms of taxation – such as progressive income tax, corporate tax, and capital tax – generates positive social and economic outcomes, debunking the myth that such forms of taxation are a drag on employment and growth.

Increased progressive taxation:

  • generates positive GDP growth rates;
  • increases employment levels over time; and
  • has a higher positive impact on the poorest households, reducing overall income inequality.

On the other hand, financing through regressive taxation – such as consumption and sales taxes – could even offset the positive changes generated by social protection transfers. This result was found in all countries studied.

Regressive forms of taxation:

  • generate dramatic negative impacts on GDP in all countries;
  • reduce employment over time; and
  • cause an additional rise in prices, reducing real income for all households.

ITUC General Secretary Sharan Burrow affirmed: “This study offers evidence for a fair increase in social-protection domestic spending. Current levels of expenditure are still very low and leave more than half of the world’s population uncovered.

“Adequate and comprehensive social protection systems are needed now more than ever. The climate crisis, together with the consequences of the COVID-19 pandemic and the global impacts of Russia’s invasion of Ukraine, is making the case for urgently expanding social protection coverage.

“Social protection builds resilience and equips countries with the necessary tools to respond to shocks and achieve just transitions.

“Governments have a variety of means at their disposal to start expanding social protection coverage. This report makes a clear case that those who can afford to pay more should be paying more, and that governments should move away from regressive forms of taxation.”