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Assessing the Impact of the 2007 Tax Reform on Povert and Inequality in Uruguay

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  • Cecilia Llambi
  • Silvia Laens
  • Marcelo Perera
  • Mery Ferrando
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    Abstract

    In the context of a sharp rise in the incidence of poverty and increasing inequality since the end of the last decade, a major tax reform was put into place in mid-2007 with the explicit goals of promoting both greater efficiency and equity in the Uruguayan tax system. Overall, the reform substantially increased direct taxes on personal income by increasing marginal rates, lowered indirect taxes and direct taxes on firms, harmonized employer contributions to social security across sectors and eliminated some highly distortionary taxes. The joint effects of these changes on the macroeconomic equilibrium, labour markets, and poverty and inequality are assessed using a top-down static CGE, a microsimulation approach. It is shown that full implementation of the tax reform has substantial general equilibrium effects which generally strengthen the reduction of poverty incidences, poverty gaps and the severity of poverty exclusively due to the introduction of the personal income tax (without behavioural responses). Regarding poverty, the general equilibrium effects are significantly greater than the direct effects. Overall, we estimate a one-point reduction of the Gini index due to the reform.

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    Bibliographic Info

    Paper provided by PEP-PMMA in its series Working Papers PMMA with number 2011-14.

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    Date of creation: 2011
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    Handle: RePEc:lvl:pmmacr:2011-14

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    Related research

    Keywords: tax Reform; CGE models; Microsimulations; Poverty; Inequality;

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    References

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    1. Blanchflower, D. & Oswald, A., 1989. "The Wage Curve," Papers 340, London School of Economics - Centre for Labour Economics.
    2. repec:idb:brikps:25658 is not listed on IDEAS
    3. Marisa Bucheli & Cecilia González, 2007. "An estimation of the wage curve for Uruguay," Documentos de Trabajo (working papers) 1107, Department of Economics - dECON.
    4. Maria Ines Terra & Marisa Bucheli & Silvia Laens & Carmen Estrades, 2006. "The Effects of Increasing Openness and Integration to the MERCOSUR on the Uruguayan Labour Market: a CGE Modelling Analysis," Working Papers MPIA 2006-06, PEP-MPIA.
    5. Manuel Flores & Adriana Cassoni, 2010. "Armington Elasticities: Estimates for Uruguayan Manufacturing Sectors," Documentos de Trabajo (working papers) 0710, Department of Economics - dECON.
    6. Almeida dos Reis, Jose Guilherme & Paes de Barros, Ricardo, 1991. "Wage inequality and the distribution of education : A study of the evolution of regional differences in inequality in metropolitan Brazil," Journal of Development Economics, Elsevier, vol. 36(1), pages 117-143, July.
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    Cited by:
    1. Teguh Dartanto, 2012. "The 2008 Corporate Income Tax Reform and Its Contribution to Poverty Reduction in Indonesia," Working Papers in Economics and Business 201203, Faculty of Economics, University of Indonesia, revised Apr 2012.
    2. Bruno Martorano, 2012. "The Impact of Uruguay’s 2007 Tax Reform on Equity and Efficiency," Working Papers - Economics wp2012_06.rdf, Universita' degli Studi di Firenze, Dipartimento di Scienze per l'Economia e l'Impresa.

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