Simulating the impact of inflation on the progressivity of personal income tax in Brazil

Abstract

Income tax reform in Brazil has mainly stressed changes in rates, aiming at increasing its progressivity. One aspect frequently overlooked is that, in the absence of adjustments of the tax rules to inflation, the level and distribution of the income tax burden can be substantially affected. We use a microsimulation model to simulate the potential revenue and distributive effects of inflation on the income tax in Brazil. Our findings suggest that if the income tax is not adjusted for inflation, progressivity would decrease but redistribution would increase due to a larger tax burden, but income inequality would not substantially change.