Mideros Mora, Andres Ivan (1,2,3); Granda Benitez, Maria Francisca (1) (2017). 'Fiscal redistribution, income inequality and human development in Ecuador' Paper presented at the annual conference of the HDCA, Cape Town 2017.


Despite not being the poorest region in the world, Latin America is the most unequal. Thus, studying the factors that contribute to sustain inequality in the region may provide valuable insight. Ecuador serves as a particularly interesting case study in terms of the regional trend because, between 2002 and 2014, it has been able to significantly reduce inequality while maintaining economic growth. While oil prices partially explain this outcome, windfall revenues have substantially declined (2014-2017). Moreover, the decline in income inequality in Latin America, and in particular in Ecuador, is also be related to a new policy model (Cornia, 2010). Ecuador's fiscal and social policies have been especially salient in the region. In particular, this study will examine the extent to which personal income taxes and consumption taxes contributed to inequality reduction compared to social policies such as domestic gas and fuel subsidies, and cash transfers in Ecuador. This study provides new insights on the effects of implementing these policies in the short-term. This is relevant in order to promote both economic stability and human development (Stiglitz, 2012).

Even though progress in the last decade, the Ecuadorian economy has been marked by high income concentration and a market based on low-skilled labor. High poverty levels have also implied low tax collection and increased social demands. On the other hand, high territorial inequality has meant that there is a reduced tax base which has incentivized the establishment of intra-regional compensation mechanisms. The country also has an extensive informal sector; this increases the risk of tax evasion. This, in turn, means that, if tax systems are poorly constructed, the informal sector could continue to increase (Gasparini, Cruces y Tornarolli, 2009; López Calva, 2010; Jiménez y Azcúnaga, 2012).

In Ecuador, the central government is responsible for redistributive policies.  Tax collection is based on volatile revenues of indirect taxes. These mainly come from value-added taxes and taxes on commodities. The collection on personal income taxes is low compared to industrialized countries. While their marginal rates have been reduced since the 1980s, the tax base has been limited due to its reliance on dependent employment. Moreover, personal income taxes have been subject to exemptions and deductions (Arias, 2008; Jiménez y López, 2012; Paz y Miño, 2015). Domestic gas and fuel subsidies, on the other hand, are high and regressive. Thus the main beneficiaries are high and medium-high income deciles which represent an important burning on public budget. Further, cash transfers are targeted to households suffering from extreme poverty.

The analysis uses EUROMOD: the tax-benefit microsimulation model for the European Union. The micro-data used in this study comes from the Ecuadorian “National Survey of Urban and Rural Households’ Incomes and Expenditures” (ENIGHUR) collected between 2011 and 2012. The tax and subsidy regulation, as well as social transfers, taken into account in this study, are those put in place since 1 January 2017. The model is a static microsimulation. This means that behavioral responses, as well as general equilibrium effects, are not considered. In addition, the simulation is based on the assumption that there is full compliance with policy rules, no tax evasion, and complete benefit take-up. This also means that the model estimates the redistributive “intended effect” of the tax-benefit system in Ecuador.

Based on Goñi, Humberto López & Servén (2011) two income levels are estimated. Market income includes earnings, as well as capital income, private pensions and transfers before taxes. Whereas, disposable income, or Post-tax income, is equal to market income plus benefits, subsidies, and social transfers, minus direct and indirect taxes. Taxes include income tax, value-added tax, and excise tax. Tax exemptions for VAT and deductions for income tax, are also analyzed as a benefit. Estimated subsidies are those concerning domestic gas and fuel consumption. Finally, social transfers include: old-age and disability social pensions paid to poor individuals, the cash transfers programs Bono de Desarrollo Humano paid to poor households with children, and Bono Joaquin Gallegos Lara paid to poor households with persons with severe disabilities.

The redistributive effect of tax-benefit policies is evaluated at two levels. First, we follow Jara & Tumino (2013) method which proposes decomposing the redistributive effect by calculating the expected amount of taxes paid and of benefits received in absolute and relative (as percentage of market and post-tax income) terms for each decile of the income distribution. This allows an analysis targeting design and progressivity. Afterwards, we employ Leventi & Vujackov´s (2016) method in order to measure the total redistributive effect by standard Gini and Palma coefficients. Finally, all the different tax-benefit instruments are evaluated in terms of their efficiency to reduce inequality in order to generate policy reform recommendations.

The study shows that the total redistribution of the tax-benefit system in Ecuador is rather modest. It is related with relatively low direct taxes, with the existence of tax exemptions and deductions, and subsidies which benefits individual at the top of the income distributions. On the other hand social transfers which may have a higher redistributive effect are low both in coverage and amount.

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