National Tax Reform and its Income Redistribution Effect on Households in Chile

National Tax Reform and its Income Redistribution Effect on Households in Chile

In Chile, since 2006, the public’s growing call for enhancement of income redistribution had precipitated massive student-led protests in 2006 and 2011, pressuring Chile’s congress to approve major changes in tax laws on October 2012. Against this backdrop, this paper compares the decile and quintile income share ratio and Gini Coefficient of income before and after tax which is measured to see whether it has alleviated income inequality or not. Furthermore, by comparing the years 2011 and 2013, one can examine if the reforms of 2012 were effective or not. The national tax reform comprised three major changes on tax revenues, which were; 1) Tax revenue decreased from the SCT (Second Category Tax), 2) Tax revenue decreased from education expense tax credit, 3) Tax revenue mostly increased from the FCT (First Category Tax). The implication tax reform has on income redistribution is that there are three functions of tax policy that can alleviate the imbalance of income redistribution. This paper examines whether the tax reform in 2012 on individual income tax contributed to increasing income redistribution in Chile in 2013, utilizing the panel data of the years 2011 and 2013.