Simulating Personal Income Tax Reforms and Fiscal Gains in the Andean Region

The aim of this paper is to assess the budgetary and distributional effects of tax policy reforms in five Andean countries: Bolivia, Colombia, Ecuador, Peru and Venezuela. The analysis makes use of harmonized multi-country tax-benefit microsimulation models to allow cross-country comparability and to assess the effect of exporting income tax policies across countries. More precisely, we perform three counterfactual simulations, whereby the personal income tax system of Uruguay, Spain and Italy are applied to each of our five Andean countries in order to assess their effect on government revenue and income redistribution with respect to the national systems. Based on this benchmarking exercise, we explore potential pathways to reform specific components of personal income tax to increase fiscal capacity in the Andean region. Our results show important gains in fiscal capacity and inequality reduction under the three policy swap scenarios; however, given the static nature of our framework, we cannot rule out potential effects on formal work incentives in the medium term. Abolishing deductions from national personal income tax systems in Andean countries would have a smaller but positive effect on tax revenue but could represent the first step towards more sustainable and equitable fiscal policies in the region.