The Impact of Uruguay's 2007 Tax Reform on Equity and Efficiency
He wishes to thank Giovanni Andrea Cornia for comments and suggestions on how to articulate this article and Veronica Amarante, Luisa Natali, Carlos Grau-Perez, Diego Aboal and other researchers at CINVE (Centro de Investigaciones Económicas) for their comments on an earlier version, as well as Cecilia Llambi and Marcelo Pereira for help with the preliminary elaboration of the ECH data and comments on a preliminary draft.
Abstract
In 2007, the Uruguayan government implemented a tax reform which introduced a new progressive labour income tax and a flat capital income tax, and reduced some indirect taxes, with the objective of improving fiscal balance, income distribution and economic growth. This article evaluates the impact of such tax reform on equity and efficiency on the basis of data derived from the Encuesta Continua de Hogares (ECH) for 2006 and 2009. Using a Difference-in-Differences technique, it shows that the new system reduced inequality by 2 Gini points without producing any discernible disincentive effect, suggesting that suitably designed reforms of direct taxation can simultaneously promote equity and efficiency.
