Effects of the progressivity of the income tax on equity level

Abstract

In the last years Latin America has experienced economic and social changes

also fiscal policy has been affected for these changes. Some countries have enacted income tax reforms to achieve more equal tax systems, some reforms have aimed to make the statutory PIT rate schedule more progressive, but other countries have sacrificed the progressivity by simplifying the calculation of the tax, or to avoid the administrative burden associated with the collection of it, possibly due the constraints to control larger number of individuals by Tax Authorities.

Top marginal tax rates for individuals and corporates have been changed during the last decades

some countries have equated the top marginal tax rates of individuals and corporates, while in other countries the tax rates are differentiated.

Results show some countries have well income tax schedule design, but the larger number of deductions, exemptions, tax credits, and other prerogatives which mostly are targeted to higher income groups, erode the taxable income and make the income tax less progressive.

Moreover, in some countries the various sources of exempt income or non-taxable income, exclude important tax revenues and make narrow tax bases

also the differentiation between marginal tax rates for wages earnings and marginal tax rates from capital income, or the elimination of latter income from the taxable income base, make the system more regressive. Results also showed that major differentiation on the progressivity of the design of the personal income tax schedule is by comparing the distance between the top and bottom marginal tax rate, among others. Simulation applied in Guatemala´s case confirmed this result.