Assessing the Impact of the 2007 Tax Reform on Poverty and Inequality in Uruguay

PEP MPIA Working Paper No. 2011-14

45 Pages Posted: 3 Oct 2011 Last revised: 11 Jul 2018

See all articles by Cecilia Llambi

Cecilia Llambi

Centro de Investigaciones Economicas (CINVE - Uruguay)

Silvia Laens

Centro de Investigaciones Economicas (CINVE - Uruguay)

Marcelo Perera

Centro de Investigaciones Economicas (CINVE - Uruguay)

Mery Ferrando

Catholic University of Louvain (UCL) - Center for Operations Research and Econometrics (CORE); Universidad de la República - Instituto de Economía

Date Written: September 1, 2011

Abstract

In the context of a sharp rise in the incidence of poverty and increasing inequality since the end of the last decade, a major tax reform was put into place in mid-2007 with the explicit goals of promoting both greater efficiency and equity in the Uruguayan tax system. Overall, the reform substantially increased direct taxes on personal income by increasing marginal rates, lowered indirect taxes and direct taxes on firms, harmonized employer contributions to social security across sectors and eliminated some highly distortionary taxes.

The joint effects of these changes on the macroeconomic equilibrium, labour markets, and poverty and inequality are assessed using a top-down static CGE, a microsimulation approach. It is shown that full implementation of the tax reform has substantial general equilibrium effects which generally strengthen the reduction of poverty incidences, poverty gaps and the severity of poverty exclusively due to the introduction of the personal income tax (without behavioural responses). Regarding poverty, the general equilibrium effects are significantly greater than the direct effects. Overall, we estimate a one-point reduction of the Gini index due to the reform.

Keywords: Tax reform, CGE models, microsimulations, poverty, inequality

JEL Classification: C15, D58, H20, I38

Suggested Citation

Llambi, Cecilia and Laens, Silvia and Perera, Marcelo and Ferrando, Mery, Assessing the Impact of the 2007 Tax Reform on Poverty and Inequality in Uruguay (September 1, 2011). PEP MPIA Working Paper No. 2011-14, Available at SSRN: https://ssrn.com/abstract=1937756 or http://dx.doi.org/10.2139/ssrn.1937756

Cecilia Llambi (Contact Author)

Centro de Investigaciones Economicas (CINVE - Uruguay) ( email )

Uruguay 1242
Montevideo, 11100
United States

Silvia Laens

Centro de Investigaciones Economicas (CINVE - Uruguay) ( email )

Montevideo, CP 11200
Uruguay

Marcelo Perera

Centro de Investigaciones Economicas (CINVE - Uruguay) ( email )

Av. Uruguay 1242
Montevideo, 11100
Uruguay

Mery Ferrando

Catholic University of Louvain (UCL) - Center for Operations Research and Econometrics (CORE) ( email )

34 Voie du Roman Pays
B-1348 Louvain-la-Neuve, b-1348
Belgium

HOME PAGE: http://www.uclouvain.be/mery.ferrando

Universidad de la República - Instituto de Economía ( email )

Joaquín Requena 1375
Montevideo, 11200
Uruguay

HOME PAGE: http://www.iecon.ccee.edu.uy/ferrando-mery/autor/8/es/

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