2014_05-21_OECD-ECLAC-PSE EU-LAC Forum_jimenez

Juan Pablo JiménezEconomic Commission for Latin America and the

Caribbean

Second European-Latin America Economic ForumEurope and Latin America in the wake of global paradigm shifts

and new trends in the world economy

Paris, OECD Headquarters20-21 May, 2014

Inequality, redistribution and

fiscal policy

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

ObjectivesI. 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.

LATIN AMERICA (17 COUNTRIES): INEQUALITY,GINI INDEX, 2002-2011

LATIN AMERICA AND OTHER REGIONS OF THE WORLD: GINICONCENTRATION COEFFICIENT, AROUND 2009 a

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.

0.52

0.440.41

0.38 0.380.35 0.33

0

0.1

0.2

0.3

0.4

0.5

0.6

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)

Since 2002: tendency change, inequality fall in most of the countries of the region

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)

Source: World Bank, World Development Indicators.

Eu

rop

a y

As

ia C

en

tra

l

Su

r d

e A

sia

Ori

en

te M

ed

io y

No

rte

de

Áfr

ica

Am

éri

ca

de

l No

rte

As

ia O

rie

nta

l y P

ac

ífic

o

Áfr

ica

Su

bs

ah

ari

an

a

Am

éri

ca

La

tina

y e

l Ca

rib

e

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0

5

10

15

20

25

30

35

Q1 Q2 Q3 Q4 Q5 D10/D1 Q5/Q1

Inco

me

shar

e

Inco

me

rati

o (

tim

es)

The distribution of wealth is even more unequal than income

Source: International Monetary Fund (2014), “Fiscal policy and income inequality”, policy paper (Washington).

INEQUALITY OF INCOME AND WEALTH IN SELECTED ECONOMIES, EARLY 2000S

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.

The top 1% of the income distribution captures more than 10% of total income, higher than other developing and developed countries

Source: Amarante and Jiménez (2014) based on Atkinson et al (2011), Alvaredo and Londoño (2013) and Burdin et al (2013)

0.0

5.0

10.0

15.0

20.0

25.0

Participación en el ingreso del 1% más rico (alrededor de 2005)

INCOME SHARE OF THE RICHEST 1%(circa 2005)

Fiscal policy has a limited role to improve

income market distribution in LALATIN AMERICA AND OECD: INEQUALITY OF MARKET INCOME AND DISPOSABLE INCOME – Total population

(Gini indexes – circa 2011)

Source: ECLAC elaboration based on household surveys for Latin America and OECDSTAT.

0,25

0,30

0,35

0,40

0,45

0,50

0,55

0,60

BRA RDO CHL ARG PAN COL CRI PRY BOL MEX PER ECU NIC URY SLV VEN ALC OECD

Ingreso de mercado Ingreso disponible en efectivoMarket income Disposable income in cash

LATIN AMERICA: DECREASE IN INEQUALITY ACCORDING TO FISCAL POLICY INSTRUMENT(Gini points – circa 2011)

The impact of pensions and transfer is more significant than

taxes

Source: ECLAC elaboration based on household surveys.

-1

0

1

2

3

4

5

6

7

8

BRA URY ARG CHL CRI MEX ALC PAN ECU PER BOL VEN NIC COL RDO SLV PRY

Pensiones públicas Otras trasferencias públicas en efectivo ISR personal y CSSPublic pensions Other public transfers in cash Personal income tax and CSS

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

COLRDOHND

CRISLVPERARGPRYBRAPANMEXCHLURYNIC

ECUVEN

Source: ECLAC elaboration

… and is concentrated in income high decils…

12

LATIN AMERICA: CONCENTRATION OF THE PERSONAL INCOME TAX COLLECTION(Percentages – circa 2011)

-10

0

10

20

30

40

50

60

70

80

90

100

ECU BRA HND PAN RDO CHL PRY NIC VEN COL ARG CRI PER MEX SLV URY

Deciles 1 a 4 Deciles 5 a 8 Decil 9 Decil 10Decils 1 to 4 Decils 5 to 8 Decil 9 Decil 10

Source: ECLAC elaboration

… its redistributive impact is very limited

13

LATIN AMERICA: REYNOLDS SMOLENSKY INDEX AND AVERAGE EFFECTIVE RATE OF PITCirca 2011

0,023

0,017

0,014

0,012

0,0100,009 0,008

0,006

0,0050,004

0,002

0

1

2

3

4

5

6

0,000

0,005

0,010

0,015

0,020

0,025

MEX ARG URY CHL BRA CRI NIC PER PAN COL RDO SLV HND ECU VEN PRY

Tasa

med

ia e

fecti

va

Reyn

olds

Sm

olen

sky

Reynolds Smolensky Tasa media efectiva

Av

era

ge

eff

ec

tiv

e r

ate

Average effective rate

Source: ECLAC elaboration

The average rate of the top decil is significantly low….

PROGRESSIVITY OF THE INCOME TAX OF INDIVIDUALS IN LATIN AMERICA, circa 2011

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.

Country Year

Average rates progression

Kakwani index

Concentration of collection (in %) (in percentages of income)

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

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

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)

Source: Own elaboration based on Gomez Sabaini and Moran (2014)

0,0

0,2

0,4

0,6

0,8

1,0

1,2

1,4

1,6

1,8

2,0

Real estate Net wealth Inheritance and donations

Financial and capital

transactions

Others on patrimony

Total taxes on patrimony

AL (18) OECD (34)

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.

There is space to strenght the “redistributive muscle” of PIT in LALATIN AMERICA: REYNOLDS SMOLENSKY INDEX AND AVERAGE EFFECTIVE RATE OF PIT UNDER

DIFFERENT SCENARIOS – circa 2011

0,0

2,0

4,0

6,0

8,0

10,0

12,0

0,000

0,005

0,010

0,015

0,020

0,025

0,030

0,035

0,040

0,045

Escenarioactual

Escenario i

Escenario ii

Escenario iii

Escenario iv

Escenario v

Escenario vi

Escenario vii

Tasa

med

ia e

fecti

va

Reyn

olds

Sm

olen

sky

Reynolds Smolensky Tasa media efectiva

Source: ECLAC elaborationNote: 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

Av

era

ge

eff

ec

tiv

e r

ate

Current scenario

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

[email protected]

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 Headquarters20-21 May, 2014

Merci beaucoup!