Taxing the rich in Latin America: Effects of a wealth tax on revenue and distribution

Wealth inequality is increasing around the world, sparking political and academic debate about whether and how to address it; hence, a wealth tax is back in the discussion. Evidence about the distribution of wealth in Latin America is relatively scarce but is growing, pointing at an extreme concentration of wealth. Could a wealth tax help reduce this inequality? How much revenue could it actually raise? We combine wealth surveys, lists of billionaires, and net wealth macro-aggregates to simulate the distributional effects of different designs for a wealth tax in Mexico, Colombia, Chile and Uruguay. We also account for administrative costs and behavioural responses, based on the literature, to assess the tax’s capacity to raise revenue and illustrate some of the trade-offs to be considered. The estimates of the distributional effects of such taxation are modest in the short run. In addition, our benchmark revenue estimate, which takes into account behavioural responses, indicates that a 1% tax on the top 1% of the wealthiest households would raise on average 0.9% of the GDP in revenue. Different designs of this tax (both in terms of rates and tax base) and assumptions regarding behavioural responses change the projected revenue, but the orders of magnitude involved suggest that wealth taxes could indeed help raise much-needed revenue in the region.