Simulating the Distributional Impacts of Fiscal Policy in Colombia Joao Pedro Azevedo Senior Economist 5/2/2019 Fiscal Policy and PSIAs

Fiscal Policy and PSIAs Objective Illustrate the use of PSIAs in the midst of policy reforms. Discuss and illustrate the application of available tools The processes through which such analyses can inform policy discourse and/or decisions 5/2/2019 Fiscal Policy and PSIAs

Fiscal Policy and PSIAs Tools Data Human Opportunity Index (HOI) Multidimentional Poverty Index (MPI) Microsimulations Household Surveys Administrative records 5/2/2019 Fiscal Policy and PSIAs

Fiscal Policy and PSIAs Projects Colombia: Productive and Sustainable Cities Development Policy Loan (P130972) Colombia: CO First Programmatic Fiscal DPL (P123267) 5/2/2019 Fiscal Policy and PSIAs

Fiscal Policy and PSIAs Urban DPL Housing policy 100,000 new houses Water and Sanitation Disaster Risk Management Transport Connectivity 5/2/2019 Fiscal Policy and PSIAs

What is the distributional impact of housing? http://public.tableausoftware.com/views/IncomeDecompColombia5/Dashboard?:embed=y 5/2/2019 Fiscal Policy and PSIAs

Microsimulation: the impact of 100,000 houses Two alternative targeting mechanisms were used: first, the poorest households are targeted, i.e. receive the houses (simulation 1), and; the households with the lowest HOI receive the 100,000 houses (simulation 2).   Baseline Simulation 1 Simulation 2 Moderate Poverty Headcount ratio (FGT0) 30.34 30.28 30.29 Moderate Poverty Income Gap ratio (FGT1) 11.59 11.28 11.30 Extreme Poverty Headcount ratio (FGT0) 7.03 6.65 6.71 Extreme Poverty Income Gap ratio (FGT1) 2.46 1.91 1.93 Inequality -- Gini Coefficient 0.53 0.5240 0.5242 Mitigating factor: Attention to the targeting! 5/2/2019 Fiscal Policy and PSIAs

Fiscal Policy and PSIAs On the process PSIA team was engaged since the pre-identification mission PSIA work was used to trim prior actions (19 initial prior actions were initially identified) Leveraging through other operations (MandE) Strengthening Public Information, Monitoring, Evaluation for Results Management in Colombia (P099139) 5/2/2019 Fiscal Policy and PSIAs

Fiscal Policy and PSIAs Colombia Tax Reform Colombia has the highest Gini in LCR Create a more progressive tax system 5/2/2019 Fiscal Policy and PSIAs

Income tax reform. Reforma tributaria Years Impact of the reform Benefit (millones de pesos colombianos nominales) Increase of revenue (as a proportion of total revenue) Increase of revenue (as a proportion of GDP) 2006 568,190 17.44 0.15 2010 920,226 30.51 0.17 Fuente: Elaboración en base a datos anonimizados de DIAN 2006 y 2010. Nota: Jorrat (2010) estima un incremento de 0.42% del PIB. La diferencia puede ser explicada por los no declarantes, efecto que solo puede ser estimado a partir de la GEIH. The law provides a 25% exemption to all workers who receive labor income. This exemption is in an aggregate variable, so that must make some assumptions. Calculating a new net taxable income and according to this variable is scaled according to the status impostiva Colombian tax.

Gini Decompositon Reforma tributaria Fuente: elaboración con panel de datos reescalado de DIAN 2006 y 2010

Are top earners captured by the survey Fuente: elaboración a partir de datos de DIAN-DANE 2006-2010 (F.210 y GEIH) Nota: se mensualizan los ingresos provenientes de DIAN. Se eliminan los outliers de ambas distribuciones. Para DIAN se utiliza el panel reponderado de datos.

Trends on inequalty of earnings among forma sector workers are significantly different Fuente: elaboración a partir de datos de DIAN-DANE 2006-2010 (F.210 y GEIH) Nota: se mensualizan los ingresos provenientes de DIAN. Se consideran para GEIH las personas formales ya que DIAN capta solo esta parte del mercado laboral.

Adjusted Gini for Colombia, showed important changes on the level and trend. Fuente: elaboración a partir de datos de DIAN-DANE 2006-2010 (F.210 y GEIH) Nota: se mensualizan los ingresos provenientes de DIAN. Se consideran para GEIH las personas formales ya que DIAN capta solo esta parte del mercado laboral. Se empalman ambas distribuciones y se computa un gini para el empalme

Sources of income are extremely different on the household survey and in the administrative records.

Adjusted Pen parade of labor income, 2010 Fuente: elaboración a partir de datos de DANE-DIAN 2006-2010 (F.210 y GEIH) Nota: se eliminan los outliers provenientes de datos agrupados de DIAN y outliers provenientes de GEIH. Las observaciones de DIAN se mensualizan. Se consideran en la GEIH las personas asalariados formales (definición productiva) según definicion de DIAN. La reescala se realiza de la siguiente manera: la cantidad de personas que recae sobre un bin en GEIH es utilizado para calcular la cantidad de bins que representa DIAN. De acuerdo a esto, de 1000 bins que representan el total distribuido, 45 bins son representados por DIAN , mientras que 955 bins representan a DIAN.

Fiscal Policy and PSIAs On the process PSIA work was able to contribute to the rationale of the reforms Work on top-earners has important political economy implications for the proposed reform 5/2/2019 Fiscal Policy and PSIAs