This book discusses different means to reduce inequality in income and wealth; firstly, through the use of redistributive taxation, secondly, through improving the economic opportunities of poor households via better access to capital markets. Chaper 2 analyzes the use of capital income taxation to reduce inequality. The analysis focuses on the trade-off between the redistributive benefits of taxation and the adverse incentive effects, the latter leading to decreased savings and potentially lower future growth rates. The analysis shows that if the population is heterogeneous with respect to productivities and endowments, zero capital income taxes are generally not optimal. The chapter further shows that the extent and composition of inequality are crucial for the size of the marginal welfare effects of taxation. While redistribution constitutes a means to improve the situation of poor households, it addresses the consequences of inequality only and not its causes. One of the most limiting factors for the economic opportunities of small entrepreneurs is the missing access to financial markets. The second part of this book looks at a microfinance institution in Bolivia, Caja Los Andes, that provides financial services to small enterprises and poor households. Chapter 3 examines the development of the enterprises and finds a strong increase in assets and income over time. Chapter 4 addresses selection issues and asks how much of this increase can be contributed to the loans distributed by Caja Los Andes. The impact analysis shows a strong positive influence of loans on growth. Perhaps surprisingly, these effects are stronger for larger businesses. In a final assessment of microfinance, chapter 5 analyzes repayment behavior in a competitive environment.
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