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

Abstract

Income tax reform in Brazil has mainly stressed changes in rates, aiming at increasing its progressivity. One aspect frequently overlooked is that, in the absence of adjustments of the tax rules to inflation, the level and distribution of the income tax burden can be substantially affected. We use a microsimulation model to simulate the potential revenue and distributive effects of inflation on the income tax in Brazil. Our findings suggest that if the income tax is not adjusted for inflation, progressivity would decrease but redistribution would increase due to a larger tax burden, but income inequality would not substantially change.<br>No Brasil, reformas do imposto de renda têm enfatizado mudanças nas alíquotas, objetivando o aumento de sua progressividade. Um aspecto frequentemente desconsiderado é que, na ausência de ajustamentos das regras do imposto em relação à inflação, o nível e distribuição da carga do imposto podem ser substancialmente afetados. Utilizamos um modelo de microssimulação para estimar os potenciais efeitos distributivos e arrecadatórios da inflação sobre o imposto de renda no Brasil. Os resultados sugerem que não ajustando o imposto de renda de acordo com a inflação, sua progressividade diminui e seu efeito distributivo aumenta. Entretanto, a desigualdade de renda não muda significativamente

The effect of fiscal drag on income distribution and work incentives: A microsimulation analysis on selected African countries

“…The study finds that fiscal drag deteriorates the progressivity of income tax. This result is supported by the research conducted by Levy et al (2010) on Brazil. Their findings show that in the absence of automatic inflation adjustment, fiscal drag weakens the progressivity property of income taxes.…”

The effect of fiscal drag on income distribution and work incentives: A microsimulation analysis on selected African countries

“…The study finds that fiscal drag deteriorates the progressivity of income tax. This result is supported by the research conducted by Levy et al (2010). Their findings show that in the absence of automatic inflation adjustment, fiscal drag weakens the progressivity property of income taxes in Brazil.…”

Inflation, External Debt, and Fiscal Mobilization in Morocco: The Transmission Channels of Devaluation and the Inflationary Past

“…Finally, the authors argue that higher inflation leads to a lower rate of stock market participation; consequently, savings decline and the distribution of wealth becomes even more unequal. Levy, Nogueira, Siqueira, Immervoll, & O'Donoghue (2010) simulate the impact of inflation on personal income tax progressivity in Brazil. The authors used a micro-simulation model to simulate the potential income and distributional effects of inflation on income taxes.…”