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Assessing the Impacts of a Major Tax Reform: a CGE-microsimulation analysis for Uruguay

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  • Cecilia Llambi
  • Silvia Laens
  • Marcelo Perera

Abstract

In 2007, a major tax reform was put into place in Uruguay with the explicit goals of promoting both greater efficiency and equity in the tax system. Overall, the reform substantially increased direct income taxes by establishing higher and rising marginal rates; lowered indirect taxation; reduced the corporate tax; harmonized employer contributions to social security across sectors and eliminated some highly distortionary taxes. We assess the joint effects of these changes on macroeconomic and labor outcomes, poverty and inequality using a top-down static CGE microsimulation approach. Overall we estimate a 1% increase in GDP and a 2% increase in employment due to the reform. We find substantial general equilibrium effects of the full implementation of the reform that tend to reinforce the reduction of poverty indicators, exclusively due to the modifications of the direct personal income tax without considering behavioral responses. Regarding poverty, the general equilibrium effects are significantly greater than the direct effects. Overall, we estimate a one-point reduction of the Gini coefficient due to the reform.

Suggested Citation

  • Cecilia Llambi & Silvia Laens & Marcelo Perera, 2016. "Assessing the Impacts of a Major Tax Reform: a CGE-microsimulation analysis for Uruguay," International Journal of Microsimulation, International Microsimulation Association, vol. 9(1), pages 134-166.
    • Handle: RePEc:ijm:journl:v:9:y:2016:i:1:p:134-166
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    Cited by:

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    2. Konstantins Benkovskis & Ludmila Fadejeva & Anna Pluta & Anna Zasova, 2023. "Keeping the best of two worlds: Linking CGE and microsimulation models for policy analysis," Working Papers 2023/01, Latvijas Banka.
    3. Lemelin, André & Savard, Luc, 2022. "What do CGE models have to say about fiscal reform?," Economic Analysis and Policy, Elsevier, vol. 74(C), pages 758-774.
    4. Veronica Amarante, 2017. "Inequality and Household Size: A Microsimulation for Uruguay," International Journal of Microsimulation, International Microsimulation Association, vol. 10(1), pages 73-105.
    5. P. Campoy-Muñoz & M. A. Cardenete & F. J. De Miguel-Vélez & J. Pérez-Mayo, 2022. "How does fiscal austerity impact on poverty and inequality? The Spanish case," Economia Politica: Journal of Analytical and Institutional Economics, Springer;Fondazione Edison, vol. 39(3), pages 715-737, October.
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    More about this item

    Keywords

    Tax reform; CGE models; Microsimulations; Poverty; Inequality;
    All these keywords.

    JEL classification:

    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • I38 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - Government Programs; Provision and Effects of Welfare Programs

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