OECD-ECLAC-PSE EU-LAC Forum

1. Inequality, redistribution
and fiscal policy
Juan Pablo Jiménez
Economic Commission for Latin America and the Caribbean
Second European-Latin America Economic Forum
Europe and Latin America in the wake of global paradigm shifts
and new trends in the world economy
Paris, OECD Headquarters
20-21 May, 2014

2. Motivation
 Inequality in Latin America has decreased in
recent times
 There is a kind of consensus about what fiscal
policy (by the expenditure side) can do to promote
more equal societies…
 However, there remains a better understanding
about what is the role of tax policy in reducing
inequality

3. Objectives
I. Evaluate the evolution of inequality with different
information sources (household surveys; PIT microdata…).
II. Analyze with more detail high income concentration,
comparing our results with other studies.
III. Study taxation of PIT and how to improve its performance
IV. Evaluate the impact of potential reforms
V. Promote a regional debate about income distribution and
taxation.

4. Since 2002: tendency change, inequality fall in
most of the countries of the region
LATIN AMERICA (17 COUNTRIES): INEQUALITY,
GINI INDEX, 2002-2011
LATIN AMERICA AND OTHER REGIONS OF THE WORLD: GINI
CONCENTRATION COEFFICIENT, AROUND 2009 a
0.52
0.44
0.41
0.38 0.38
0.35
0.33
0.6
0.5
0.4
0.3
0.2
0.1
0
Latin America
and the
Caribbean
(18)
Sub-
Saharan
Africa
(37)
East Asia
and the
Pacific
(10)
North Africa
and Middle
East
(9)
South
Asia
(8)
Eastern
Europe and
Central Asia
(21)
OECD
(20)
Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of special tabulations of data from household surveys conducted in the respective countries;
World Bank, World Development Indicators [online].
a The regional data are expressed as simple averages, calculated using the latest observation available in each country for the 2000-2009 period.
b Organization for Economic Co-operation and Development.

5. The relationship between the richest and
poorest decil is significantly higher than in
other region of the world
STRUCTURE OF INCOME DISTRIBUTION, CIRCA 2009
(In percentages and number of times)
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
Source: World Bank, World Development Indicators.
35
30
25
20
15
10
5
0
0%
Europa y Asia Central
Sur de Asia
Oriente Medio y Norte de África
América del Norte
Asia Oriental y Pacífico
África Subsahariana
América Latina y el Caribe
Income ratio (times)
Income share
Q1 Q2 Q3 Q4 Q5 D10/D1 Q5/Q1

6. The distribution of wealth is even more
unequal than income
INEQUALITY OF INCOME AND WEALTH IN SELECTED ECONOMIES, EARLY 2000S
Source: International Monetary Fund (2014), “Fiscal policy and income inequality”, policy paper (Washington).

7. Problems for the measurement of inequality
 Current discussion: better understand the recent fall and
its possible sustainability, and discuss about inequality
measurement
 Questioning the indicators used to reflect inequality and
the sources of information used
 Information sources: Main limitation of household
surveys: problems to capture high incomes.
 There is not an entirely appropriate way to solve this
problem. One possibility are the adjustments with
National Accounts, which implies assuming this source is
of better quality.
 Another possibility: incorporating estimates of income
tax records.

8. The top 1% of the income distribution captures
more than 10% of total income, higher than other
developing and developed countries
25.0
20.0
15.0
10.0
5.0
0.0
Participación en el ingreso del 1% más rico
INCOME SHARE OF THE RICHEST 1%
(alrededor de 2005)
(circa 2005)
Source: Amarante and Jiménez (2014) based on Atkinson et al (2011), Alvaredo and Londoño (2013) and Burdin et al
(2013)

9. Fiscal policy has a limited role to improve
income market distribution in LA
LATIN AMERICA AND OECD: INEQUALITY OF MARKET INCOME AND DISPOSABLE INCOME – Total population
(Gini indexes – circa 2011)
0,60
0,55
0,50
0,45
0,40
0,35
0,30
0,25
Ingreso de mercado Market income InDgisrpeossoa bdleis ipncoonmibe lien ceans hefectivo
BRA RDO CHL ARG PAN COL CRI PRY BOL MEX PER ECU NIC URY SLV VEN ALC OECD
Source: ECLAC elaboration based on household surveys for Latin America and OECDSTAT.

10. The impact of pensions and transfer is
more significant than taxes
LATIN AMERICA: DECREASE IN INEQUALITY ACCORDING TO FISCAL POLICY INSTRUMENT
(Gini points – circa 2011)
8
7
6
5
4
3
2
1
0
-1
BRA URY ARG CHL CRI MEX ALC PAN ECU PER BOL VEN NIC COL RDO SLV PRY
Pensiones públicas Otras trasferencias Public pensions Other public transfe rps úinb cliacsahs en efectivo ISPRe rpseornsaol ninaclo ym CeS tSax and CSS
Source: ECLAC elaboration based on household surveys.

11. Althought PIT rates are very progressive…
LATIN AMERICA: KAKWANI INDEX OF PERSONAL INCOME TAX, circa 2011
0 0,1 0,2 0,3 0,4 0,5 0,6
VEN
ECU
NIC
URY
CHL
MEX
PAN
BRA
PRY
ARG
PER
SLV
CRI
HND
RDO
COL
Source: ECLAC elaboration

12. … and is concentrated in income high decils…
12
LATIN AMERICA: CONCENTRATION OF THE PERSONAL INCOME TAX COLLECTION
(Percentages – circa 2011)
100
90
80
70
60
50
40
30
20
10
0
-10
DDeecciilless1 1to a 4 4 DDeecciillses5 5to a 8 8 DDeecciill 99 DDeecciill 1100
ECU BRA HND PAN RDO CHL PRY NIC VEN COL ARG CRI PER MEX SLV URY
Source: ECLAC elaboration

13. … its redistributive impact is very limited
13
LATIN AMERICA: REYNOLDS SMOLENSKY INDEX AND AVERAGE EFFECTIVE RATE OF PIT
Circa 2011
0,023
0,017
0,014
0,012
0,010
0,009 0,008
0,006
0,005
0,004
0,002
6
5
4
3
2
1
0
0,025
0,020
0,015
0,010
0,005
0,000
MEXARG URY CHL BRA CRI NIC PER PAN COL RDO SLV HND ECU VEN PRY
Tasa media efectiva
Reynolds Smolensky
Reynolds Smolensky Tasa media efectiva
Average effective rate
Average effective rate
Source: ECLAC elaboration

14. The average rate of the top decil is
significantly low….
PROGRESSIVITY OF THE INCOME TAX OF INDIVIDUALS IN LATIN AMERICA, circa 2011
Country Year
Average rates progression
Source: ECLAC based on households surveys.
Notes: Results subject to review. The calculations were made with respect to disposable income.
a It was only considered part of the tax on labor income, since in the survey capital income are aggregated with other
income.
b Simulation according to the current tax.
Kakwani
index
Concentration of
(in percentages of income) collection (in %)
D1 D2 D3 D4 D5 D6 D7 D8 D9 D10 Total bottom
40%
top 20%
Argentina 2011 0.0 0.0 0.0 0.0 0.1 0.2 0.4 0.9 2.5 9.0 3.9 0.42 0.0 96.0
Brazil a 2011 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.2 0.7 6.6 2.8 0.43 0.0 99.2
Chile 2011 0.0 0.0 0.0 0.0 0.0 0.1 0.1 0.3 0.9 7.1 3.2 0.44 0.0 98.5
Colombia 2011 0.2 0.2 0.2 0.2 0.3 0.3 0.4 0.5 0.8 4.4 2.1 0.37 1.0 93.1
Costa Rica 2011 0.0 0.0 0.0 0.0 0.1 0.1 0.2 0.5 1.6 5.3 2.4 0.40 0.0 96.5
Ecuador 2011 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 2.5 0.9 0.52 0.0 99.9
El Salvador 2011 0.0 0.0 0.0 0.1 0.2 0.3 0.5 0.8 1.3 3.6 1.6 0.41 0.4 88.0
Honduras 2010 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.4 2.9 1.3 0.40 0.0 99.8
Mexico 2010 -2.1 -1.9 -1.4 -0.9 -0.2 0.6 1.4 2.6 4.7 10.6 5.0 0.44 -3.6 94.7
Nicaragua 2009 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.2 0.5 4.8 1.8 0.48 0.0 98.2
Panama 2011 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.2 0.5 4.5 1.9 0.43 0.0 98.6
Paraguay b 2011 0.0 0.0 0.0 0.0 0.0 0.1 0.0 0.1 0.1 1.2 0.5 0.43 0.1 96.8
Peru 2011 0.0 0.0 0.0 0.1 0.1 0.2 0.4 0.7 1.2 4.7 2.0 0.42 0.2 92.6
Dominican Rep. 2011 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.6 4.3 2.0 0.39 0.0 99.5
Uruguay 2011 0.0 0.0 0.1 0.1 0.3 0.6 1.0 1.9 3.6 8.8 3.7 0.44 0.3 89.1
Venezuela 2011 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.1 0.3 2.3 0.7 0.54 0.1 96.2

15. Why tax policy has had such low
influence on income distribution?
 Tax burden low and volatile
 Low when compared with its relative development as well with other regions
 Tax revenue depend on volatile tax bases, such as consumption and the prices
of natural resources
 Tax revenue is three times more volatile than in developed countries
 Unbalanced structure
 Biased towards consumption taxes
 While income taxes increased, there is a significant gap in the personal
income tax when compared with other regions
 The income tax is mainly based on corporations and the personal income tax
on wage income
 Low property taxes, mainly based on financial transactions
 Narrow tax base
 High informality added to evasion limits already narrow tax bases
 Widespread use of tax expenditures generates significant tax collection loss
 Widespread use of simplified procedures

16. Low property taxes, mainly based on
financial transactions
STRUCTURE OF THE COLLECTION OF PATRIMONIAL TAXES IN LATIN AMERICA AND THE OECD, 2011
(in percentages of GDP)
2,0
1,8
1,6
1,4
1,2
1,0
0,8
0,6
0,4
0,2
0,0
Real estate Net wealth Inheritance and
donations
Source: Own elaboration based on Gomez Sabaini and Moran (2014)
Financial and
capital
transactions
Others on
patrimony
Total taxes on
patrimony
AL (18) OECD (34)

17. Impact of potential reforms
 Impact of potential reforms in PIT structure
 PIT w-o tax expenditure
 PIT household
 PIT flat
 PIT dual
 PIT standard
 Impact of potential reforms in PIT revenue
 Increase average rate of tenth decil to 20%
 Increase average rate of tenth decil to 20% and
10% to eight and ninth decil.

18. There is space to strenght the “redistributive
muscle” of PIT in LA
LATIN AMERICA: REYNOLDS SMOLENSKY INDEX AND AVERAGE EFFECTIVE RATE OF PIT UNDER
DIFFERENT SCENARIOS – circa 2011
12,0
10,0
8,0
6,0
4,0
2,0
0,0
0,045
0,040
0,035
0,030
0,025
0,020
0,015
0,010
0,005
0,000
Escenario
actual
Escenario
i
Escenario
ii
Escenario
iii
Average effective rate
Escenario
iv
Escenario
v
Escenario
vi
Escenario
vii
Tasa media efectiva
Reynolds Smolensky
Reynolds Smolensky Tasa media efectiva
Source: ECLAC elaboration
Note: Scenarios: i- PIT without tax expenditures; ii- PIT household; iii- PIT Flat; iv- Dual PIT; v- Standard PIT; vi- Rate
of 20% for D10 and vii- Rate of 20% for D10 and 10% for D 8 and 9.
Average effective rate
Current
scenario

19. Conclusions and challenges
 Beyond the fall of inequality since 2002-2003 in most countries of the
region…..
 ..remains the need to debate whether its measurement from household
surveys is not underestimating the high concentration of income.
 PIT: Two things were noted: an increase in minimun rates, which helped to
increment collection, and a decrease of the marginal maximum rate, which
lead the tax to lose progressivity.
 There is space to improve the distributional impact of PIT
 The utilization of tax microdata opens an interesting research agenda for
studies of inequality; complementing the information of household surveys
 It also allows to evaluate possible tax reforms to strengthen the distributive
muscle of our tax systems
 This line of work implies two challenges:
 A challenge for the statistical systems: their scope and potential depend
of the quality and integration of these statistical systems
 A challenge for the tax authorities: regular access to tax records is
required

20. Merci beaucoup!
Juanpablo.jimenez@cepal.org
Second European-Latin America Economic Forum
Europe and Latin America in the wake of global paradigm shifts
and new trends in the world economy
Paris, OECD Headquarters
20-21 May, 2014