The Distributional Effects of Crises in Latin American Countries: a tax channel?
Latin America is the most volatile and crisis-prone region in the world. Since crises tend to aggravate disparities in income, the high persistence of crises in the region has been associated with its exceptionally high levels of socio-economic inequality. The literature on inequality has therefore recognized that avoiding crises and mitigating their effects are also distributional policies in themselves. In this context, there has been interest in determining if, during times of crisis, Latin American economies react in a way that smoothes the aforementioned distributional effects. Most studies on the subject have focused on how expenditure policy reacts to crises and how it affects poverty. In contrast, there are, surprisingly, no attempts to describe how tax policy reacts during economic crises and how this affects not just the persistence of poverty, but rather socio-economic inequality. Tax policy, like expenditure policy, is a common reaction to crises with strong distributional effects. During crises, tax rates and revenues change, due to either automatic adjustments or to reforms which can range from temporary to general and permanent, affecting the socio-economic distribution of a country. This study will evaluate the effects of economic crises known as “sudden stop” crises on income inequality from a tax policy point of view which will try to answer a) if taxes increase during these crises and b) if taxes become more progressive during crises, using a mixed methodology that includes quantitative econometric and descriptive analysis, qualitative methods based on case studies, semi-structured interviews and a literature review on tax reforms in Latin America.