Publication: Colombia’s 2012 Tax Reform: Poverty and Social Impact Analysis

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World Bank
This report summarizes the results of the PSIA and explains the three analyses used to determine the impact of the tax reform. The first analysis integrates data from administrative tax records with household statistics from the Gran Encuesta Integrada de Hogares (GEIH) conducted by the Departamento Administrativo Nacional de Estadística (DANE) to correct for the problem of underrepresentation of high-income households that is typical of household surveys. The second analysis, which is based on consumption data from the Encuesta de Calidad de Vida (ENCV) also conducted by DANE, follows the LATAX micro-simulation technique and focuses on the effect of taxes on income distribution and on government revenues on the assumption that individuals’ purchasing habits remain the same. The third analysis uses a general equilibrium model of the labor market to estimate the impact of the tax reforms on the labor market and on informality. The first analysis shows that the effects of Colombia’s income tax reform serve the intended purpose of reducing income inequality. Results based on the constructed full income distribution, which uses administrative tax records and household survey data, indicate that the Gini coefficient decreases from 0.586 to 0.579. Considering that the average yearly reduction of the Gini coefficient in Latin America over the last 10 years was 0.51 percentage points, the estimated reduction in Colombia’s Gini coefficient is not trivial. These results also demonstrate the importance of using the full income distribution to calculate true inequality in a country.
World Bank. 2014. Colombia’s 2012 Tax Reform: Poverty and Social Impact Analysis. © World Bank, Washington, DC. License: CC BY 3.0 IGO.
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