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The Impact of Uruguay’s 2007 Tax Reform on Equity and Efficiency

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  • Bruno Martorano

    ()
    (UNICEF Innocenti Research Centre, Florence)

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    Abstract

    In 2007, the Uruguayan government implemented a new tax reform which introduced a new progressive labour income tax, a flat capital income tax, and reduced some indirect taxes, with the objective of improving fiscal balance, income distribution and economic growth. This paper presents an evaluation of the impact of such tax reform on equity and efficiency on the basis of data derived from the Encuesta Continua de Hogares (ECH) for the years 2006 and 2009. Using a Difference-in-Differences technique, the paper shows that the new tax system lowered inequality by 2 Gini points without producing any discernible disincentive effect. These results contrast with the conclusions of supply side-economics and suggest that suitably designed reforms of direct taxation can simultaneously achieve the goals of equity and efficiency.

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    Bibliographic Info

    Paper provided by Universita' degli Studi di Firenze, Dipartimento di Scienze per l'Economia e l'Impresa in its series Working Papers - Economics with number wp2012_06.rdf.

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    Length: 18 pages
    Date of creation: 2012
    Date of revision:
    Handle: RePEc:frz:wpaper:wp2012_06.rdf

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    Related research

    Keywords: Tax reform; tax incidence; income distribution; efficiency; matching estimators;

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    1. Amarante, Veronica & Vigorito, Andrea, 2011. "Uruguayâ..s Income Inequality and Political Regimes during 1981â..2010," Working Paper Series UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
    2. Emmanuel Saez & Joel B. Slemrod & Seth H. Giertz, 2009. "The Elasticity of Taxable Income with Respect to Marginal Tax Rates: A Critical Review," NBER Working Papers 15012, National Bureau of Economic Research, Inc.
    3. Alberto Alesina & Guido Cozzi & Noemi Mantovan, 2012. "The Evolution of Ideology, Fairness and Redistribution," Working Papers 2012_05, Durham University Business School.
    4. Cornia, Giovanni Andrea & Martorano, Bruno, 2011. "A New Fiscal Pact, Tax Policy Changes and Income Inequality," Working Paper Series UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
    5. Cecilia Llambi & Silvia Laens & Marcelo Perera & Mery Ferrando, 2011. "Assessing the Impact of the 2007 Tax Reform on Povert and Inequality in Uruguay," Working Papers PMMA 2011-14, PEP-PMMA.
    6. Deaton, Angus, 1985. "Panel data from time series of cross-sections," Journal of Econometrics, Elsevier, vol. 30(1-2), pages 109-126.
    7. World Bank, 2008. "Uruguay : Poverty and Social Impact Assessment of the Tax Reform," World Bank Other Operational Studies 7890, The World Bank.
    8. Calvin Blackwell, 2007. "A Meta-Analysis of Tax Compliance Experiments," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper0724, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
    9. repec:rie:review:v:14:y:2009:i:1:n:8 is not listed on IDEAS
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