Taxes and Income Distribution in Chile: Some Unpleasant Redistributive Arithmetic / Eduardo M.R.A. Engel, Alexander Galetovic, Claudio E. Raddatz.

Format:

Book

Author/Creator:

Engel, Eduardo M.R.A.

Contributor:

National Bureau of Economic Research.

Galetovic, Alexander.

Raddatz, Claudio E.

Series:

Working Paper Series (National Bureau of Economic Research) no. w6828.

NBER working paper series no. w6828

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

Taxes and Income Distribution in Chile

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1998.

Summary:

This 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.

Notes:

Print version record

December 1998.