Taxes and Income Distribution in Chile: Some Unpleasant Redistributive ArithmeticThis 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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1996 tax structure a₁ Alejandra Mizala allowances and underreporting amount underreported Article 57 assume business tax Caras del Proteccionismo CASEN survey Chilean tax system computable general equilibrium consumption deadweight loss decile pays decile's distribution of income distributional impact Dolmen-CEA Eduardo Engel Estudios Públicos evasion Fischer y Alexander flat tax gasoline GC tax Gini coefficient i-th decile import tariffs impute income bracket income distribution indirect taxes José De Gregorio libro Las Nuevas Nuevas Caras number of non-filers optimal tax system optimal to levy overall tax burden Pechman percentile Pilar Romaguera poor individual poorest decile profits retained progressive income tax progressive tax proportional tax quintile ratio reported retained by firms richest decile Ronald D Ronald Fischer Santiago Scenario share of income slightly regressive system in 1996 tax VAT tax-free allowances taxation taxes paid taxpayers unequal the pre-tax Universidad de Chile value added tax wage tax wealthiest decile