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

Horacio Levy, Jose Nogueira, Rozane Bezerra de Siqueira (), Herwig Immervoll and O’Donoghue, Cathal ()
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Rozane Bezerra de Siqueira: Universidade Federal de Pernambuco, Recife
O’Donoghue, Cathal: National University of Ireland, Galway and IZA, Bonn
Authors registered in the RePEc Author Service: Cathal O'donoghue

No 2008-01, LATINMOD Working Papers Series from Tecnológico de Monterrey, Campus Ciudad de México

Abstract: Income tax reform proposals in Brazil have focused almost exclusively on changes in rates, aiming at increasing its progressivity. One important aspect that has been overlooked is the fact that, in the absence of a mechanism that adjusts the tax rules to price movements, the effects of inflation on the level and distribution of the income tax burden can be substantial, even in periods of low inflation (“bracket creep”, fiscal drag). Moreover, how inflation affects the progressivity of the income tax depends on the specifics of the tax structure. Making use of a tax-benefit microsimulation model for Brazil (BRAHMS), we simulate different scenarios regarding the level of inflation and the adjustment of the income tax rules in order to assess the potential revenue and distributive effects of inflation on the income tax in Brazil. Our findings suggest that the Brazilian income tax is quite sensitive to fiscal drag. If the income tax is not adjusted for inflation, progressivity would decrease but redistribution would increase due to a larger tax burden. However, as income tax revenue and redistribution are quite low, even after relatively high levels of inflation, the tax burden and income inequality would not substantially change.

Date: 2008-03
New Economics Papers: this item is included in nep-acc, nep-cmp, nep-mac and nep-pub
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Journal Article: Simulating the impact of inflation on the progressivity of personal income tax in Brazil (2010)
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