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Uruguay: Poverty and Social Impact Assessment of the Recent Tax Reform

Date: May 19, 2009

Presenter: Emily Sinnott (Senior Country Economist, LAC PREM)

Discussant: Hassan Zaman (Lead Economist, PRMPR)

The paper analyzes the impact of a recent tax reform in Uruguay on tax incidence and poverty. The reform involved the introduction of a dual personal income tax, which taxes labor income at progressive rates and capital income at lower, proportional rates. Indirect taxation rates are also reduced. One of the main objectives of the tax reform is to create a more equitable tax structure. Through use of static micro-simulation analysis, we calculate for each individual/household the total amount of direct and indirect taxes due before and after the tax reform. From this, we then assess how each individual/household is affected, and thus calculate the poverty and income inequality indicators before and after the reform. Our findings suggest that the reform represents a progressive change for households.

The aim of the study is to inform policy discussion on the distributional implications of the tax reform. The Poverty and Social Impact Assessment (PSIA) analysis commenced as an activity to support the series of Uruguay Programmatic Reform Implementation Development Policy loans, which support the implementation of the tax reform.


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