My HeyDay

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Uruguay: Anatomy of a Beautiful Reform

For more than a century and a half, Partido Colorado and Partido Nacional ruled Uruguay. But with the victory of Tabare Vazquez in the 2005 presidential elections, the left party Broad Front took office with a long-pending redistributive agenda.

One of the first priorities of the new cabinet was to introduce a fairer tax reform. In Uruguay, as it is usually the case of small nations, equality is a highly ranked social value. And it is also highly correlated with satisfaction with democracy across the region. Even if Uruguay's poverty line and inequality levels (0,45) are the lowest in Latin America, the long corporatist tradition of the country, tweaked by the liberalization in trade and capital unleashed in the 1990s, emphasized an unfair distribution of the tax burden, coming mainly from [formal] workers' shoulders and poor households' pockets.

Same tax burden, but a more equitable burden distribution

Tabare's government wanted to increase vertical and horizontal equality of the tax system, and to do so he had to reduce consumption taxes -which affects mainly to the poor- and increase the weight and progressiveness of income taxes.

  • Income tax levels became more progressive and went up for the richest, especially the 10% richest, who saw a 150% increase compared to the previous system:

  • Consumption taxes went down for everybody, especially the poorest, who consume most or all their income:

  • The tax burden became fairer, more efficient, less economically disturbing, and more Western European. Inequality post-tax and poverty levels dropped a little bit, but the whole system provided future governments with the right tools to raise more revenues if they are willing to expand further social policies. At the end of the day, equality is mainly achieved through social expenditure, not taxation --but you need to have the money first:

The reform revealed the scheme of winners and losers: businessmen protested, and the most negatively affected groups demonstrated, mainly medical doctors, lawyers and other very well-paid liberal professionals. But again, a sense that equality was a social value to be pursued in Uruguay mitigated their resistance, adding to the countermeasures of this tax reform: a general improvement in the quality of government-provided services, especially universal healthcare.

Beautifully done, Tabare.

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11 Responses to “Uruguay: Anatomy of a Beautiful Reform”

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