Why Uruguay has the best income redistribution in Latin America

Latin America is one of the most unequal regions in the world: its tax and transfer systems show modest results when it comes to reducing inequality. However, there is one exception: Uruguay.

Uruguay is going through the most important growth cycle in its history. It has been growing uninterrupted since the last quarter of 2003, having gone through the global crisis of 2008 and the regional crises of countries that are very important for Uruguay, such as Argentina and Brazil.

According to the latest World Bank studies, Uruguay today has the highest GDP per capita in Latin America ($ 16,245), and the lowest inequality: it has the lowest Gini index in the region (39.5).

Income redistribution

In April 2019, the Office of Planning and Budget (OPP) of Uruguay presented the study "Income redistribution in Latin America: a microsimulation approach", which analyzes the effect of transfers and direct taxes on poverty and income distribution in Argentina, Bolivia, Colombia, Ecuador, Uruguay, and Venezuela.

The research, which was conducted jointly by working groups of the aforementioned countries, concludes that Uruguay has the most redistributive system in Latin America, where "inequality decreased nine percentage points (pp) according to the difference in the Gini index. of market income and disposable income after taxes and transfers, "reads the OPP website. The second most redistributive country is Argentina, followed by Venezuela, Ecuador, Colombia, and Bolivia.

The study showed that the Uruguayan system also stands out in terms of its impact on poverty reduction. "The Foster-Greer Thorbecke indices show a high disparity in terms of the population living in poverty, with lower levels of incidence, poverty gap, and severity in Uruguay, and higher levels in Colombia," the document reads.

Since 2005 a set of public policies have been carried out that, as a whole, have allowed Uruguay to grow economically as never before. This growth comes hand in hand with greater equity and social justice, with a greater redistribution of wealth, which was reoriented towards the most humble sectors and public social spending. Mainly invested in education, health, security and housing.

In addition to the redirection of public spending, there are three key policies: tax reform, restructuring of labor policies and growth of real wages, and promotion of productive investments.

Key policies

Regarding the tax reform, elements that give progressivity to tax collection were incorporated, under the slogan that it does not matter only to collect, but to do it fairly, charging more to the one who has more and earns more.

In 2007 the Frente Amplio (FA) Government incorporated Personal Income Tax (IRPF) with progressive income taxes, substituting the wage tax, which charged the same percentage to all taxpayers, regardless of the amount of income. With the IRPF the collection was varying in terms of fiscal weight according to the income deciles of the population. Today the richest deciles are those that have a greater tax burden. Income to capital was also taxed. All this gave much greater progressivity to the tax system.

The study presented by the OPP analyzed what would happen if the personal income tax of Uruguay were applied in other countries. This type of policy exchange would be especially effective for Venezuela, where Uruguay's income tax would reduce inequality by an additional 1.14 pp. Bolivia would experience a reduction in inequality of 0.53 pp, and to a lesser extent, followed by Argentina and Colombia (0.15 and 0.14 pp respectively).

At the same time, the Salary Councils were reinstated in 2005 (tripartite areas of negotiation of working conditions), which allowed the real salary to have grown uninterruptedly in Uruguay since that time. Well-paid employment is one of the main social policies. Uruguay has had a very aggressive policy of promoting productive investments, goods, and services, which generate well-paid quality jobs.

The OPP website states that they expect the results of the study to be considered when implementing public policies in developing countries.

Image by Steve Buissinne from Pixabay

Source: Sputnik

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