Automatic stabilization: the missing welfare dimension in Latin America

In this paper, Olivier Bargain, H. Xavier Jara, and Iva V. Tasseva extend the LACIR chapter by Lustig et al. (2023a) by adding a new welfare dimension to the analysis of tax-benefit systems – automatic stabilization, i.e., the ability of systems to mitigate income losses. Using tax-benefit models with nationally representative household survey data from different countries, they show that tax-benefit systems in Latin America and the Caribbean (LAC) outperform those in other developing regions like Sub-Saharan Africa (SSA) in terms of income redistribution and poverty reduction. However, similar to those in SSA, LAC systems provide a limited degree of automatic stabilization against income shocks. This limited capacity is due to three factors: (i) the prevalence of a large informal sector, which limits the role of social insurance contributions and personal income taxation; (ii) the presence of high tax exemption thresholds and generous tax deductions; and (iii) the design of cash transfer programs as proxy means-tested benefits, which prevents them from acting as stabilizers. 

 

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