Brief | Progressive tax reforms in Latin America: Strengthening the redistributive impact of the tax system

As the primary source of revenue for public expenditure aimed at providing social welfare and public goods, as well as a redistributive instrument in its own right, taxation is central to equity. Regarding the latter, Latin America presents a negative illustration, as its income inequality is notorious while its fiscal systems—and especially, its tax policies—do very little to remedy this. Not only is household inequality stubbornly high, but public opinion nearly unanimously regards this as unfair and lamentable. 

Why is Latin American taxation such a weak instrument for improving equity? First, the tax burden is low compared to more advanced economies, leaving little space for fiscal redistribution. Secondly, its average reliance on the personal income tax (PIT), considered as a fraction of either GDP or total revenue, is the smallest of all world regions. Consumption taxes are correspondingly heavy. Thirdly, all major tax types—PIT, corporate income tax (CIT), and consumption taxes (principally the value-added tax, VAT)—contain a host of exemptions and “incentives,” which reduce revenue while favoring the wealthy households and larger firms that can take advantage of them. 

With this background in mind, this brief describes three tax reforms—in Uruguay in 2006, Chile in 2014, and Colombia in 2022—that explicitly sought to improve equity, in the latter two cases while also collecting more revenue. The reform in Uruguay succeeded on these terms, helped along by a general economic expansion associated with a sustained rise in commodity prices largely due to demand from China. The reforms in Chile and Colombia succeeded only in part, due to political obstacles and less favorable economic conditions. Nonetheless, all three reform processes suggest lessons for progressive-minded reformers elsewhere.