Taxing the rich in Latin America: revenue and distributional effects of a wealth tax

Wealth inequality is increasing around the world, sparking political and academic debate about if and how to address it; hence the wealth tax is back in the discussion. Evidence about wealth distribution in Latin America is relatively scarce but it is growing, pointing at extreme concentration of net wealth. Could a wealth tax help reduce wealth inequality? How much revenue could it actually raise? We combine wealth surveys, billionaires lists, and net wealth macro-aggregates to simulate the distributional effects of different wealth tax designs in Mexico, Colombia, Chile and Uruguay. We also account for administrative costs and behavioral responses based on the literature to assess the potential revenue-generating capacity of the tax and illustrate some of the trade-offs to be considered. The estimates of the distributional effects of wealth taxation are modest in the short run, but a simple dynamic exercise shows that the cumulative effect is substantial. In turn, our benchmark revenue estimate, which accounts for behavioral responses, indicate that a 1% tax on the top 1% wealthiest households raises on average 0.8% of the GDP in revenue. Different tax designs (both in terms of rates and tax base) and assumptions regarding behavioral responses change the projected revenue, but the orders of magnitude involved suggest that wealth taxes could indeed help collect much needed revenue in the region.