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Taxes, Transfers and Income Distribution in Chile: Incorporating Undistributed Profits

Author

Listed:
  • Bernardo Candia

    (Universidad de Chile)

  • Eduardo Engel

    (Universidad de Chile)

Abstract

This paper seeks to measure the distributive impact of fiscal interventions in Chile, applying the “Commitment to Equity” (CEQ) methodology, a standardized fiscal incidence analysis. As a methodological innovation, we incorporated income accrued and not received by Chilean taxpayers through their companies and corporations into the distribution of pre-fiscal income. We find that the difference between the distribution of accrued and received income turns out to be important, around 6 Gini percentage points for each main concept of income. In addition, when moving from the distribution of market income to the distribution of final income (after taxes and transfers) the distribution of income improves by 7 Gini percentage points. To assign the improvement in the distribution of income between the different fiscal interventions, we apply the Shapley value and it is observed that half of the improvement in the distribution of income is due to transfers in education, while direct taxes only explain 20% of the reduction of the Gini coefficient. Finally, based on the simulation of the impact of the 2014 tax reform carried out by the World Bank, we estimate that the reform would produce an additional reduction of 2.4 Gini percentage points when going from market income to final income.

Suggested Citation

  • Bernardo Candia & Eduardo Engel, 2018. "Taxes, Transfers and Income Distribution in Chile: Incorporating Undistributed Profits," Commitment to Equity (CEQ) Working Paper Series 82, Tulane University, Department of Economics.
    • Handle: RePEc:tul:ceqwps:82
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    File URL: http://repec.tulane.edu/RePEc/ceq/ceq82.pdf
    File Function: First version, 2018
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    References listed on IDEAS

    as
    1. Luis López-Calva & Eduardo Ortiz-Juarez, 2014. "A vulnerability approach to the definition of the middle class," The Journal of Economic Inequality, Springer;Society for the Study of Economic Inequality, vol. 12(1), pages 23-47, March.
    2. 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.
    3. Ali Enami , Nora Lustig and Rodrigo Aranda, 2017. "Analytic Foundations: Measuring the Redistributive Impact of Taxes and Transfers - Working Paper 446," Working Papers 446, Center for Global Development.
    4. Kakwani, Nanok C, 1977. "Measurement of Tax Progressivity: An International Comparison," Economic Journal, Royal Economic Society, vol. 87(345), pages 71-80, March.
    5. Mercedes Sastre & Alain Trannoy, 2002. "Shapley inequality decomposition by factor components: Some methodological issues," Journal of Economics, Springer, vol. 9(1), pages 51-89, December.
    6. Agostini, Claudio & Martínez A., Claudia & Flores, Bárbara, 2012. "Distributional effects of eliminating the differential tax treatment of business and personal income in Chile," Revista CEPAL, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL), December.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Fiscal incidence; inequality; poverty; undistributed profits; taxes; transfers; Chile;

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence

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