ECONOMISTS IN RECENT YEARS have become increasingly aware of the deficiencies in their customary treatment of the distribution of income and wealth. The conservative bias toward accepting the distributional outcomes generated by the market system, which has traditionally been common in the profession, has been sharply eroded by the accumulating evidence of market imperfections, by the new respectability of radical ideologies, and, not least, by the exposure of many economists to the pervasiveness of distributional issues in the real world. This new interest in distribution has taken many forms, from the publication of several important treatises and symposia on the theory and practice of income distribution to frequent statements by the various international agencies of their concern with distributional questions.
This new interest in distribution has, of course, been reflected in public finance literature as well. In fact, the subject is hardly a new one there, for the major questions confronting fiscal experts have always been distributional in nature, even if it has not always been considered wise to acknowledge this fact. Nevertheless, it seems fair to say that in recent years there has been a marked revival of concern with the impact, actual or potential, of the fiscal system on the distribution of income and wealth.
One manifestation of this concern is the growing number of studies on the incidence of the tax system—and, less often, of government expenditure as well—in one developing country or another. More generally, the need to relate fiscal analysis more closely to development theory by considering as explicitly as possible the interaction between tax and expenditure policy, income distribution, and economic growth has come increasingly to the fore. In addition, as has long been true, tax reports in all countries customarily contain many references to the progressivity or otherwise of this or that tax, references that presumably allude to its effect on the distribution of income and wealth, although this is not always made as clear as one might hope. Finally, no conference on either taxation or income distribution would be complete without a session on the connection between the two.
It is impossible in one article to review all the literature relevant to the effects of taxation on income distribution in Latin America. We have therefore chosen to focus here on the narrower subject of the methods, findings, and usefulness of those quantitative studies that seek to determine the redistributive impact of Latin American tax systems. The continuing production of such studies by scholars and fiscal reform commissions in Latin America, as in the rest of the world, sufficiently justifies this focus. Section I summarizes the principal characteristics of the available studies and considers the numerous definitional and statistical problems that bedevil them. Section II discusses a number of more basic conceptual and technical problems that call into question both the underlying rationale and the usefulness for policy purposes of many of these studies. There is perhaps little that is surprising about any of the points made in this section, except the fact that they are so commonly ignored. Section III sketches briefly a few suggestions for redirecting to potentially more useful ends some of the scarce talent that might otherwise be devoted to similar questionable calculations of the distribution of the tax “burden.”
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Mr. Bird, Chief of the Tax Policy Division of the Fiscal Affairs Department, is a graduate of Dalhousie University (Halifax, Canada) and Columbia University. He has taught at Harvard University and the University of Toronto and has written several books and numerous articles.
Mr. De Wulf, economist in the Tax Policy Division, has degrees from Louvain University (in Belgium) and Clark University (Worcester, Massachusetts). He formerly taught at the American University of Beirut.
This paper was originally presented at the Conference on Equity and Income Distribution in Latin America held at Georgetown University on November 17, 1972. The present version reflects helpful comments from Fuat Andic, Charles McLure, Jacob Meerman, Carl Shoup, and Richard Webb.
References shown in parentheses refer to items listed in the Bibliography, pp. 677–82.