In several previous posts, we have explained how the GINI index can be used to quantify the degree of income inequality within a population or country. The higher the GINI index, the more inequality there is. National comparisons of inequality are usually based on working out the GINI index for countries using their residents’ gross (pre-tax) incomes. However, it is also possible to calculate the GINI index for net incomes, incomes after taxes have been taken into account.
This enables economists to assess the impact of tax systems on income distribution (and income inequality) in a country.
The graph below (Figure 2 from Brown et al, 2013) shows pre- and post-tax income GINI coefficients for a selection of countries, including the larger economies in Latin America.
In the European countries, such as Belgium and Sweden, on this chart, the GINI coefficient after tax (dark bars) is much lower than the GINI coefficient before tax (light-colored bars). This means that the taxation system has led to less income inequality than existed prior to taxation. In general terms, this means that the tax system is (overall) a progressive one [i.e. one where taxes take an increasing proportion of income as income rises].
In Latin American economies, a different picture emerges. With the exceptions of Brazil and Costa Rica, the GINI coefficients after taxes are taken into account are actually higher than the GINI coefficients before tax, meaning that income inequalities have become greater as a result of the tax system. In general terms, these tax systems are regressive [where taxes take a decreasing proportion of income as income rises].
In Brazil and Costa Rica, the levels of income inequality remain unchanged after taxation is taken into account.
Clearly, if reducing income inequality is a priority for Latin America, then something has to change. Whether a nation prefers a tax system that is regressive or progressive is a question of political beliefs and policy, as well as a question of economics.
It should be noted that the chart is based on calculations using data from 2012 or earlier. It will be interesting to see how Mexico’s recent major fiscal reforms impact its GINI coefficient in the coming years. Will the recent reforms lead to a more equitable situation and reduce the GINI coefficient, or will they foment greater inequality of income, making the rich richer and the poor poorer?
The exact methodology used to derive the post-tax GINI coefficient is not clear in the original article. In particular, it is unclear whether or not the after-tax income in the chart includes the large number of Mexican workers in the informal sector who generally do not pay any income or payroll tax.
Source of image:
“Towards financial geographies of the unbanked: international financial markets, ‘bancarization’ and access to financial services in Latin America” by Ed Brown, Francisco Castañeda, Jonathon Cloke and Peter Taylor, in The Geographical Journal, vol 179-3, September 2013, 198-210.
- Extreme poverty declined between 2010 and 2012 (Feb 2014)
- Poverty on the rise in some states in Mexico (Jan 2014)
- Disparities in wealth: trends include a growing middle class as well as more millionaires (Jun 2013)
- The widening income gap in Mexico; the rich earn 26 times more than the poor (Dec 2011)
- The GINI index: is inequality in Mexico increasing? (Oct 2011)
- Is poverty in Mexico on the rise? (Sep 2011)
- Inequality in wealth in Mexico: the GINI index (Feb 2011)
- Females, males and gender inequality in Mexico (Jan 2010)