Systematic Literature Review

Systematic Literature Review

Distributional Effects of Income Tax in Peru Compared with the Rest of South America

Income and distributional inequality in Latin America has been a significant problem in terms of economic progression warranting the revisions of tax policies and systems in a bid to overcome the problem (Jimenez, Juan, & Andrea, 2010). However, it has been noted that the tax reforms have done little in the alleviation of these inequalities with Peru being the worst hit of all nations. Latin America has adopted a progressive system of taxation that charges different levels of income tariffs to its natives. Progressive taxation institutes a fixed percentage of tax on an individual’s income level such that low earning individuals tend to be charged low levels of tax while high-income earners contribute more taxes to the government. However, equity is achieved in that the charges maintain a similar proportional charge transversing across all income level groups. Unlike the other Latin American nations, Peru’s income tax is presently highly unequal as it conforms to a regressive pattern as opposed to the desired progressive nature of discriminatory taxation. Mahon (2009), notes that the regressive nature of Peru’s taxation system is because of its Value Added Tax (VAT) and other indirect forms of taxation.

Theoretical evidence traces the problem to the late twentieth century period, with the taxation systems being retrogressive in nature. Latin America adopted tax reforms initially in the 1960s with the focus being the “expansion of the value-added tax (VAT), significant cuts in trade tariffs, and the strengthening of tax administration…with these reforms, redistribution became a secondary goal of tax design rather than a primary one,” (Mahon, 2009, p.3-4). This strategy only ensured income redistribution equality on a horizontal setting where equity was only achieved in households that shared the same levels of income. Vertical (progressive) equity that ensures an association across various income levels was sidelined during the reforms. Fiscal policies used during this period therefore aimed at achieving higher redistribution revenue levels through enhanced parallel households’ equity that would ensure economic liberalization.

To achieve horizontal equity, the Peruvian government focused on indirect taxes that up to date constitute to the highest revenue avenues. Note that, personal income taxes as compared to corporate (indirect) income taxes achieve a higher redistribution as they are achieved by a higher populace than the latter. This has been the root problem of Latin American as the reliance on indirect taxes has only realized very limited distributional effects as in the long-term period the resource base has diminished considerably (Haughton, 2005). Peru has a peculiar trend with regard to its fiscal policy as unlike the other regions of Latin America, it has combined both its direct and indirect income taxes in its economy only to result into enhanced inequality. The theoretical framework to be used in this study will therefore offer an in-depth discussion and analysis of the origin of the Peruvian income distributive problem. Additionally, we shall review how this problem relates to its poor fiscal policy management and implementation.

The dissertation’s aims and objectives will relate to the theme of the discussion and the methodology to be employed is a literature review. This means that the adapt used will be acquired from secondary peer-reviewed sources that contain earlier research material on the study topic and the subsequent conclusions that will be of significant help to the background of the problem and the relevant advances that have been made to avoid repetition and information redundancy. Haughton’s publication, Tax and Expenditure Incidence in Peru, is a very helpful resource for thesis direction as it offers a systematic methodology that revolves under the Peruvian economy and the different areas in which the government acquires tax. Additionally, the distributive aspects of each tax are reviewed providing a deeper analysis into the subject. Cubero and Ivanna’s (2010) publication offers a good format that can be combined with a different set of data for the thesis.


Bargain, O., & Tim, C. (2010). Analysing the Effects of Tax-benefit Reforms on Income Distribution: A Decomposition Approach. Journal of Economic Inequality, 8 (1), 1-21.

Cubero, R., & Ivanna, V. H. (2010). Equity and Fiscal Policy: The Income Distribution Effects of Taxation and Social Spending in Central America. IMF Working Paper, WP/10/112. Retrieved from

Haughton, J. (2005). Tax and Expenditure Incidence in Peru. Retrieved from

Jinemez, J. P., Juan, C. G. S., & Andrea, P. (2010). Tax gap and equity in Latin America and the Caribbean. Public Finance and Administrative Reform Studies, 16, 1-44.

Mahon, J. (2009). Tax Reforms and Income Distribution in Latin America. Latin America Studies Association. Retrieved from…/MahonJames.pdf







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