The effect of tax on income inequality and growth in Latin America.


After tax reforms in the 1980s and 1990s, income inequality increased in many Latin American countries

The tax reforms of the 2000s have been more equalizing in terms of income inequality: Argentina, Honduras and Nicaragua have seen the most redistribution of income

Taxation remains unequalizing in about one-third of Latin American countries, especially in Central America

During the 1980s and 1990s, tax reforms in Latin America were primarily focused on economic efficiency, horizontal equity and revenue adequacy. To accomplish these goals, governments tried to widen tax bases by implementing VAT and other domestic consumption taxes and reducing direct personal income taxes.

Overall, these reforms resulted in decreased revenue for governments, slow growth and a general erosion of the tax base by inflation. Many of the Latin American countries were also forced to cut public expenditures on investments and human capital in order to meet debt servicing obligations; the long-term impact on growth and budget deficits of the taxation reform was therefore negative. These reforms contributed to a rise in income inequality over the 1980s and 1990s as tax burdens shifted from the wealthy to the middle and lower classes in many locations.

Tax reforms in Latin America during the 2000

Tax reforms representing a big shift in fiscal policy took place in Latin America in the 2000s. These reforms were initially prompted by the lack of adequate growth and the failure of previous policies to reduce income inequality. Over time, governments in the region had realized the urgent need to address inequality with revised fiscal policies. The need for 'fiscal exchange', in which governments raise taxes and increase the quantity and quality of social services provided, was also promoted.

Tax reforms during the 2000s came in several forms. First, administrative reforms attempted to decrease the cost of tax collection and reduce tax evasion. Second, changes in tax policies introduced direct progressive income taxation in some countries and reduced exemptions and reductions. Presumptive taxes--taxes based on estimates conducted by tax authorities rather than on income declared by the tax payer'" and so called 'surrogate' taxes on financial transactions were also introduced in some countries, including Brazil. No major changes were implemented to VAT or trade taxes, but some governments did introduce other indirect taxes to increase revenue, such as Ecuador, where a tax...

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