The Next Step in Improving Equity: Tax Reform JUAN PABLO JIMÉNEZ AND ISABEL LÓPEZ AZCÚNAGA
Fiscal policy can influence the redistribution of income and equity through social spending or through
tax policy. When analyzing the impact of tax policy on
inequality, both the level and structure of the tax system are relevant. Not every tax policy affects income
inequality or equity the same way.
Direct taxes—if structured progressively—tend to
have a positive impact on the redistribution of income.
In contrast, indirect taxes such as value-added taxes
(VAT) tend to be neutral or negative. However, within
the category of direct taxes, personal income tax typically has a more salutary effect on redistribution than
corporate income tax, because corporations often transfer the tax burden to consumers through the prices of
the goods or services. Moreover, when analyzing the
equity impact, it is important to distinguish between
horizontal equity (equal treatment to those who are
in similar circumstances) and vertical equity (up and
down the income line).
Historically, fiscal policy in Latin America has had a
relatively low impact on income redistribution. For example, compared to the European Union (EU), Latin American tax policy has only a minimal effect on reducing
inequality. In EU countries, after considering all fiscal
adjustments, the Gini coefficient (0.46) decreases by 0.12
points; in contrast, Latin America’s Gini coefficient (0.52)
decreases by a mere 0.01 points after fiscal adjustments. 1
Figure 1 compares the individual and combined effects of taxation and public transfers on inequality in
Latin America and the EU. When analyzing the impact
of social spending and of the tax system separately, a
higher impact of social spending is observed in the EU
than in Latin America. But also, the impact of the tax
system, mainly through direct taxes, is much higher.
The impact of indirect taxes is regressive in both regions.
The bleak conclusion is that current tax systems are
failing to achieve their full potential in addressing severe socioeconomic gaps. The reasons are clear: a narrow and volatile tax base, an unbalanced tax structure
with very little emphasis on direct taxes, and low levels
of tax compliance are the region’s biggest impediments
to forming equitable and robust tax policies.
The Rich in Latin America Can
Bear Higher Burdens
Latin America has the second lowest tax burden in the world, after the developing countries of Asia. When compared to more developed regions, the average tax burden in Latin America ( 18. 4 percent of GDP) is
nearly half the average in OECD countries ( 34. 8 percent
of GDP) and the EU ( 39. 2 percent of GDP). [see figure 2]
Within the region, however, there are profound
differences. Brazil, Argentina and Uruguay have tax
burdens closer to the levels of developed regions,
FIGURE 1. LATIN AMERICAN AND EU COUNTRIES: DISTRIBUTIVE IMPACT
OF FISCAL POLICY (Gini coefficient)
0.52 0.51 0.50
0.36 0.31 0.34
COUNTRIES IN THE LATIN AMERICA AVERAGE INCLUDE ARGENTINA, BRAZIL, CHILE, COLOMBIA, MEXICO, AND PERU.
SOURCE: GOÑI, E., J.H. LÓPEZ AND L. SERVÉN (2011), “FISCAL REDISTRIBUTION AND INCOME INEQUALITY IN LATIN AMERICA,” THE WORLD BANK.
Latin America average
Gini before transfers and taxes
Gini after transfers and direct taxes
Gini after transfers and before taxes
Gini after transfers and direct and indirect taxes
138 Americas Quarterly SPRING 2012