Taxes and Income Distribution in Chile: Some Unpleasant Redistributive Arithmetic
AbstractThis 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 0.448 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.
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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 6828.
Date of creation: Dec 1998
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Other versions of this item:
- Engel, Eduardo M. R. A. & Galetovic, Alexander & Raddatz, Claudio E., 1999. "Taxes and income distribution in Chile: some unpleasant redistributive arithmetic," Journal of Development Economics, Elsevier, vol. 59(1), pages 155-192, June.
- Eduardo Engel & Alexander Galetovic & Claudio Raddatz, 1998. "Taxes and Income Distribution in Chile: Some Unpleasant Redistributive Arithmetic," Documentos de Trabajo 41, Centro de Economía Aplicada, Universidad de Chile.
- H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence
- H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- 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.
- Charles L. Ballard & Don Fullerton & John B. Shoven & John Whalley, 1985.
"A General Equilibrium Model for Tax Policy Evaluation,"
National Bureau of Economic Research, Inc, number ball85-1, October.
- Ballard, Charles L. & Fullerton, Don & Shoven, John B. & Whalley, John, 2009. "A General Equilibrium Model for Tax Policy Evaluation," National Bureau of Economic Research Books, University of Chicago Press, edition 0, number 9780226036335, Winter.
- 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.
- 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.
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