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Learning from your neighbor: tax-benefit systems swaps in Latin America

Abstract

Over the last decades, Latin American countries have experienced a noticeable decrease in income inequality. While this trend is mainly associated with a decline in wage inequality, progressive reforms of the tax-benefit systems of the region may have played a role. While redistributive systems in Latin America are still in their infancy, they are constantly expanding and do so at different pace in the region. To investigate this point in a comparative way, the present study exploits newly developed tax-benefit microsimulation models for Ecuador and Colombia. These two neighboring countries show contrasted situations in terms of income distribution and we characterize the extent to which this difference is explained by different tax-benefit systems. The comparative nature of our microsimulation models allows us to swap tax-benefit systems between countries to produce counterfactual simulations whereby the system of a country is applied to the population of the other. In this way, we can decompose the total country difference in income distribution to extract the role of different tax-benefit policies. We confirm that the Ecuadorean system is more redistributive and quantify the difference: if the Ecuadorean system was applied to the Colombian population, the Gini coefficient would be reduced by 1.7 points in Colombia. Headcount poverty would decrease by around 10% and the intensity of poverty by up to 14.7%. This analysis contributes to the recent literature on the redistributive role of tax-benefit systems in Latin America and highlights the role of microsimulation techniques to show how countries in the region can learn from each other in order to improve social protection and reduce income inequality.

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Acknowledgments

This work was supported by the Economic and Social Research Council (ESRC) through the Research Center on Micro-Social Change (MiSoC) at the University of Essex, grant number ES/L009153/1. The results presented here are based on ECUAMOD v1.0 and COLMOD v1.0. ECUAMOD is developed, maintained and managed by UNU-WIDER in collaboration with the EUROMOD team at ISER (University of Essex), SASPRI (Southern African Social Policy Research Institute) and local partners in selected developing countries (Ethiopia, Ghana, Mozambique, Tanzania, Zambia, Ecuador and Viet Nam) in the scope of the SOUTHMOD project. The local partner for ECUAMOD is Instituto de Altos Estudios Nacionales (IAEN). We are indebted to the many people who have contributed to the development of SOUTHMOD and ECUAMOD. The results and their interpretation presented in this publication are solely the authors’ responsibility.

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Correspondence to H. Xavier Jara.

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Bargain, O., Jara, H.X. & Rodriguez, D. Learning from your neighbor: tax-benefit systems swaps in Latin America. J Econ Inequal 15, 369–392 (2017). https://doi.org/10.1007/s10888-017-9367-5

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Keywords

  • Tax-benefit policy
  • Microsimulation
  • Inequality
  • Poverty