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Taxes and Income Distribution in Chile: Some Unpleasant Redistributive Arithmetic

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  • Eduardo Engel

    ()

  • Alexander Galetovic

    ()

  • Claudio Raddatz

Abstract

This paper quantifies the direct impact of taxes on income distribution at the household level in Chile and estimates the distributional effect of several changes in the tax structure. We find that income distributions before and after taxes are very similar (Gini coefficients of 0.488 and 0.496, respectively). Moreover, radical modifications of the tax structure, such as raising the value added tax from 18 to 25% or substituting a 20% flat tax for the present progressive income tax affect the after-tax distribution only slightly. We present some arithmetic showing that the scope for direct income redistribution through progressivity of the tax system is rather limited. By contrast, for parameter values observed in Chile, and possibly in most developing countries, the targeting of expenditures and the level of the average tax rate are far more important determinants of income distribution after government transfers. Thus, a high-yield proportional tax can have a far bigger equalizing impact than a low-yield progressive tax. Moreover, a simple model shows that the optimal tax system is biased against progressive taxes and towards proportional taxes, with a bias that grows with the degree of inequality of pre-tax incomes. Our results suggest that to reduce income inequality, the focus of discussion should be on the amount to be redistributed, the targeting of public spending, and the relative efficiency of alternative taxes, and not on the progressivity of the tax system.

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Bibliographic Info

Paper provided by Centro de Economía Aplicada, Universidad de Chile in its series Documentos de Trabajo with number 41.

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Date of creation: 1998
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Handle: RePEc:edj:ceauch:41

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Web page: http://www.dii.uchile.cl/cea/
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  1. Charles L. Ballard & Don Fullerton & John B. Shoven & John Whalley, 1985. "A General Equilibrium Model for Tax Policy Evaluation," NBER Books, National Bureau of Economic Research, Inc, number ball85-1, July.
  2. Shah, Anwar & Whalley, John, 1991. "Tax Incidence Analysis of Developing Countries: An Alternative View," World Bank Economic Review, World Bank Group, vol. 5(3), pages 535-52, September.
  3. Charles L. Ballard & Don Fullerton & John B. Shoven & John Whalley, 1985. "Introduction to "A General Equilibrium Model for Tax Policy Evaluation"," NBER Chapters, in: A General Equilibrium Model for Tax Policy Evaluation, pages 1-5 National Bureau of Economic Research, Inc.
  4. Muhammad Hussain Malik & Najam Us Saqib, 1989. "Tax Incidence by Income Classes in Pakistan," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 28(1), pages 13-26.
  5. Richard M. Bird & Luc Henry De Wulf, 1973. "Taxation and Income Distribution in Latin America: A Critical Review of Empirical Studies (Fiscalité et redistribution des revenus en Amérique latine: une revue critique de quelques études em," IMF Staff Papers, Palgrave Macmillan, vol. 20(3), pages 639-682, November.
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