The Impact of Taxes and Social Spending on Inequality and Poverty in El Salvador

El Salvador is a middle-income country with a population of 6.2 million and an average per capita income of US$7,441.70 in purchasing power parity (PPP) in 2012.1 In that year, the Gini coefficient was 0.425 and the poverty rate, measured using the international poverty line of US$2.50 a day PPP 2005, was 14.7 percent. With growing debt and a persistent fiscal deficit, El Salvador faces major fiscal policy challenges. In this context, it is essential to know the impact of fiscal policy on inequality and poverty to have a basis for evaluating alternative courses of action to achieve fiscal stability.

To this end, we present here a fiscal impact study to estimate the effect of taxes, social spending, and subsidies on inequality and poverty. To determine the distribution of the fiscal burden and the benefits of social spending, we developed concepts of income before and after fiscal interventions, by category and as a whole based on data from the 2011 Multi-Purpose Household Survey (EHPM), and administrative data from various sources. The study uses the methodology proposed by the Commitment to Equity (CEQ) Institute, 2 so that the results for El Salvador can be compared with countries that have similar income levels in Latin America and outside the region, where the same methodology has been applied.

Some fiscal incidence studies available for El Salvador analyze only a subset of fiscal policy components; for example, Acevedo and González3 analyzed the impact of taxes on inequality, but did not consider public spending. The Central American Institute for Fiscal Studies (ICEFI)4 analyzed the impact on inequality of taxes and public spending in the social area, but did not include the effect of subsidies. Barreix, Martín, and Roca5 and Cubero and Hollar6 dealt with progressivity and regressivity of taxes and spending for education and health for the Central American countries, including El Salvador; however, none of the above studies considered the effects on poverty

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