Assessing the role of tax‐benefit policies during the COVID‐19 pandemic: Evidence from the Andean region

Abstract

AbstractThis paper aims to assess the role of tax‐benefit policies in mitigating the effects of COVID‐19 on the distribution of household disposable income in Colombia, Ecuador, and Peru. We exploit data from phone surveys collected during the pandemic combined with tax‐benefit microsimulation techniques to nowcast the distribution of household disposable income. Our results show a sharp drop in household disposable income and a dramatic increase in poverty and inequality during the second quarter of 2020. By the end of 2020, the economy recovers but poverty and inequality remain above the pre‐pandemic levels. COVID‐related policies cushion the effect of the crisis at the bottom of the distribution, and their effect on poverty and inequality largely depends on the generosity of the benefits implemented. By contrast, automatic stabilizers mitigate the impact of the income shock at the top of the distribution due to the effect of social insurance contributions and personal income tax, whereas social assistance programs in place before the pandemic fail to act as automatic stabilizers due to their design as proxy means‐tested benefits. We validate our nowcasting estimates with actual survey data from the end of 2020 and show that our results match closely poverty and inequality indicators in all three countries.