In search of tax progressivity in developing countries: analysing Chile's tax system as a case study

The thesis analyses tax systems in developing countries from a distributional perspective, by using the Chilean tax system as a case study. The motivation for this study is the concerning co-existence in developing countries of very high levels of inequality with tax systems that show very low (or no) progressivity. From that motivation, the main objective of the thesis is to identify available progressive tax reforms that could be implemented at a limited efficiency cost. The thesis is divided in three parts. Part I deals with general preliminary issues before embarking an in-depth analysis of the tax code of the case study. The first chapter identifies the pattern present in developing countries, where high levels of inequality coexist with low (or no) tax progressivity (the ‘inequality/progressivity paradox’). A theory is offered to explain the emergence of this paradox. The second chapter tests the theory proposed for the emergence of the paradox against the historical evolution of the Chilean tax code, while the third chapter explores political obstacles to progressive tax reforms. Part II analyses the indirect tax system to identify available reforms that meet the criteria of being both progressive but entailing reduced efficiency costs. Chapters 5 analyses the VAT and Chapter 6 analyses excise taxation. Part III analyses the direct tax system with a similar objective. Chapter 6 deals with the personal income tax system while Chapter 7 examines the taxation of wealth. The thesis identifies available reforms throughout the tax system that could deliver substantial distributional gains at a limited efficiency cost.