Taxation and Redistribution

Pre-fiscal inequality in LAC is among the highest in the world. However, existing analyses suggest that while fiscal policy reduces inequality, this reduction is small relative to the potential in LAC. In some countries, fiscal policy is poverty-increasing.

On the revenue side, a system that is heavily tilted towards consumption taxes and with limited progressivity in income taxes does not redistribute much either. pension systems in LAC are often regressive. Workers who transit between the formal and informal sectors during their careers do not make sufficient contributions to obtain the right to a contributory pension, while paying payroll taxes that are effectively subsidizing the upper middle class and the rich.

The fourth theme will consider the limited role that fiscal redistribution plays in the region to level the playing field. It will consider issues of equity and efficiency on both the revenue and expenditure sides of the government’s balance sheet.