But the degree to which asset inequality translates into income inequality depends on the. redistributive capacity of the state. 9 For a discussion of the anti-poverty effect of taxes and transfers in industrialized countries see Smeeding (2006). First, the biggest contrast between the two regions in terms of income inequality concerns the distributional impact of the tax and transfer system.
This may affect asset accumulation by the poor and thus impact the distribution of future market income. We begin by reviewing the facts on income inequality and the redistributive performance of the fiscal system in Latin America. With these caveats in mind, Figure 1 reports the value of the Gini coefficient of the distributions of disposable income (panels A and B) and market income (panels C and D) in Latin America (panels A and C) and Europe (panels B) and D).13 Inspection of.
However, the situation is dramatically different when looking at panels C and D, which show the Gini coefficients of the market income distribution (i.e. before tax and transfer). The incidence of transfers is estimated from the information in Lindert et al. That is, it seems that the largest difference between the levels of disposable income inequality in the two regions is due to the different impact of taxes and transfers: they significantly reduce market income inequality in Europe, and very little in Latin America.
Due to fiscal policy, the Gini coefficient of the distribution of after-tax income is on average 1.5 percentage points lower than that of market income.
What limits fiscal redistribution in Latin America?
In other words, the differences between the distributions of market and disposable income (such as those implied by Figure 1 above) probably overemphasize the redistributive role of the state, because they ignore the usually regressive impact of indirect taxes. We can consider the left side of the equation as the redistributive impact of the fiscal system - given by the difference between the degree of inequality of market income, and that of disposable income (measured by the Gini coefficients of the respective distributions). 18. This expression shows that the redistributive impact of the fiscal system is proportional to the tax effort.
Thus, with an effective tax rate of 50 percent, a 5 percentage point increase in the Gini coefficient for market income would translate into a 2.5 point increase in disposable income. Considering the tax effort, the more progressive the taxation structure, the greater the redistributive role of the state. Similarly, the impact of changes in the tax rate on the distribution of disposable income depends on the targeting of transfers and on the progressivity of the tax system.
But despite the upward trend, collection volumes remain well below the international norm. Latin America's income tax rates are on the low end of the spectrum, for both personal and corporate income. 23 In the case of the income tax, our measure of productivity is based on the upper marginal rate.
In Peru, for example, an increase in taxes and transfers is accompanied by an increase in inequality, reflecting the regressivity of the transfer system (in that transfers contribute to greater income inequality). The few assessments available of the impact of taxes in Latin America tend to find a neutral or regressive effect. In eight of them the overall effect of the tax system appears to be regressive; in the other two it is about neutral.
The other is that the targeting of the given volume of transfers is not very progressive. This is in stark contrast to what we see in Europe, where each quintile receives about 20 percent of the total -- i.e. inspection of this figure shows that these programs are regressive, especially in the case of pensions, in which the top two quintiles of the population draws about 80 percent of the expenditure.
31 In other words, the curves portray the empirical estimates of the parameters presented earlier in the baseline. More dramatically, in Peru the simulation would require the redistribution of 43 percent of transfers from the top quintile to the bottom three quintiles.
Concluding remarks
In contrast, even significant increases in the progressivity of Latin America's tax systems – which currently appear to be more or less neutral from the perspective of distribution – are likely to have only a modest effect on the distribution of income. In other words, from the perspective of reducing inequality, the overall volume of tax revenue is likely to be a more important priority than the progressivity of the revenue raising system - a conclusion that reflects the experience of the European countries discussed in the paper is. These considerations provide some guidance for designing reforms to make Latin America's fiscal systems more conducive to equity.
Under these circumstances, raising tax collection is unlikely to help much - without improving the targeting of the spending it finances. This does not mean that the structure of the tax system is irrelevant, but only that tax choices must primarily be based on the effectiveness and administrative costs of different taxes. Finally, we have limited our attention to the redistributive function of the state through taxes and cash transfers.
Through these indirect channels, fiscal policy can also have a major impact on Latin America's inequality. This means that fiscal prudence, possibly guided by formal fiscal rules that allow the operation of countercyclical policies – and especially of countercyclical social spending – is also an essential part of a fiscal agenda to reduce inequality in Latin America. Gomez-Sabaini (2005); "Evolución y situación tributaria actual en América Latina: Una serie de temas para la discusción," mimeo, Economic Commission for Latin America and the Caribbean.
IADB (1995); "Hacia una Economía Menos Volatil," in Economic and Social Progress in Latin America (IPES). Shapiro (2005); Redistributing income for the poor and the rich: public transfers in Latin America and the Caribbean, The World Bank. Aldunate (2006); "Política fiscal y protección social," Gestion Publica N. 53, Economic Commission for Latin America and the Caribbean.
Served (2005); Argentina's Macroeconomic Collapse: Causes and Lessons. in Joshua Aizenmann and Brian Pinto, eds., Managing Economic Volatility and Crises: A Practitioner's Guide. Liquidity Needs and Vulnerability to Financial Underdevelopment Recent Tax Policy Trends and Issues in Latin America”, in Policies for Growth: The Latin American Experience, International Monetary Fund. 1999); "Taxation in Latin America: Structural Trends and Governance Implications," IMF Working Paper WP/99/19. 2006) "Government Programs and Social Outcomes: Comparing the United States with Other Rich Nations", in A.
