Bargain, O., Jara, H. X. and Tasseva, I. (20204). “Automatic stabilization: the missing welfare dimension in Latin America”, LACIR, June 2024.
We extend the LACIR chapter by Lustig et al. (2023a) by adding a new welfare
dimension to the analysis of tax-benefit systems – automatic stabilization, i.e., the ability of systems
to mitigate income losses. Using tax-benefit models with nationally representative household
survey data from different countries, we show that tax-benefit systems in Latin America and the
Caribbean (LAC) outperform those in other developing regions like Sub-Saharan Africa (SSA) in
terms of income redistribution and poverty reduction. However, similar to those in SSA, LAC
systems provide a limited degree of automatic stabilization against income shocks. This limited
capacity is due to three factors: (i) the prevalence of a large informal sector, which limits the role
of social insurance contributions and personal income taxation; (ii) the presence of high tax
exemption thresholds and generous tax deductions; and (iii) the design of cash transfer programs
as proxy means-tested benefits, which prevents them from acting as stabilizers.