Distributional Effects of Taxation in Latin America
- Our analysis of taxation redistribution utilizes household and public finance data for 10 Latin American countries, making it one of the first studies to address almost 90% of the tax burden to get a better estimation of the actual tax burden on inequality and poverty.
- It departs also from the standard assumptions of the standard model of incidence to accommodate the main characteristics and structure of the actual tax system and administration and of the combination of deep market inequality and informality in LAC. The study incorporates the analysis of the CIT to direct taxes since, in LAC, most of the taxation on dividends is done at the corporate rather than at the personal level, and the PIT appears less redistributive than when considered integrated with the CIT.
- Direct taxes are, as expected, progressive (equalizing) in all countries. The impact on inequality and poverty of direct taxes suffers from the effect of payroll taxation, which tends to make them less progressive, and benefits from the CIT, which makes them more progressive.
- Indirect taxes are almost uniformly regressive in all countries, but because poor households often buy their stuff in informal markets, indirect taxes become less regressive. The bulk of poverty increase after taxes in the region mainly due to indirect taxation.
- While LAC tax systems increase income inequality for some countries and it reduces it for others, in all countries they increase poverty, primarily due to both payroll taxation and consumption taxes. The burden of taxation is higher in the poorest deciles than in the lower middle deciles and in many countries the burden on the first deciles is even higher than on the richest decile.
