Does reducing municipal taxes work to increase revenue and reduce inequality at the metropolitan level? Evidence from Santiago de Chile

Abstract

In the debate on the advantages and disadvantages of fiscal decentralization, there is less evidence on the effect of fiscal autonomy for Latin American metropolises, which are characterized by inequality, low fiscal decentralization and high concentration of population and economic activity. This study asks two questions about the decrease in business taxes in municipalities in Santiago de Chile between 2008 and 2020. The first is about the impact of this measure on local revenue collection, and the second is about the effect of the policy on metropolitan inequality, considering municipalities’ own revenues. The method used is difference‐in‐differences with variation in treatment timing. The results confirm that this measure led to a 35% increase in revenue collection compared with municipalities that do not apply it. In terms of municipal autonomous income inequality, the evidence indicates that, on average, levels are reduced by 0.02 points of the Gini Index per year. These findings confirm that greater fiscal autonomy can contribute to increased resources for local governments and reduce metropolitan disparities, in a context of high centralization and low fiscal autonomy.