Simulating the impact of inflation on the progressivity of personal income tax in Brazil

1
Simulating the impact of inflation on the
progressivity of personal income tax in Brazil

• Horacio Levy
• ISER University of Essex, Colchester and ECV,
  Vienna
• José Ricardo Nogueira
• Universidade Federal de Pernambuco, Recife
• Rozane Bezerra de Siqueira
• Universidade Federal de Pernambuco, Recife
• Herwig Immervoll
• OECD, Paris, ECV, Vienna, ISER University of
  Essex, Colchester and IZA, Bonn
• Cathal ODonoghue
• National University of Ireland, Galway and IZA,
  Bonn

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Motivation (1/2)
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Motivation (2/2)
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Outline

• Fiscal drag and distortions of the tax function
• Inequality and redistribution measurement
• Model, data and simulation
• Income tax and inflation
• Income tax responsiveness to inflation
• Income tax and inflation adjustment 2003-2008
• Income tax and inflation 2003-2008 no adjustment
  
• Conclusions
• Next steps

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Fiscal drag and distortions of the tax function

• Immervoll (2005) RIW
• t  t(y) s( y a(y) ) c(y)
• Inflation-induced effect on progressivity
• s(.)? depends on the distribution of taxable
  incomes in relation to s(.)
• a ? depends on the shape of the tax schedule,
  s(.)
• c ? reduce tax progressivity
• Inflation-induced effect on after tax household
  income distribution
• Progressivity
• Size of tax burden
• Pattern of household sharing across tax-units

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Inequality, progressivity and redistribution
measurement

• Inequality Gini (S-Gini, ethical parameter v)
• Progressivity Kakwani
• k C(tax) G(gross)
• Redistribution
• RE G(gross) G(net)
• where, d re-ranking and r size of the
  instrument (µg - µn)/ µg

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Model, data and simulation

• Model BRAHMS
• Data PNAD 2003
• Simulation
• Assumptions
• Validation
• Inflation adjustment

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Income tax responsiveness to inflation

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Income tax and inflation adjustment 2003-2008

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Income tax and inflation 2003-2008 no adjustment

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Conclusions

• Income tax revenue is elastic to fiscal drag
• Income tax progressivity decreases with non
  adjusted inflation
• Redistribution increases with inflation if the
  income tax is left unadjusted
• 2003-2008 opposite effects due to
  over-adjustment
• Fiscal drag is not an alternative for tax reform
  in Brazil
• Microsimulation as a tool for assessment of
  alternative policy design

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Next steps

• Decompose effect by s(.), a(.) and c(.)
• Extend analysis to other policies
• Extension of BRAHMS