The Poverty and Social Impact Assessment(PSIA) analyzes the impact of the tax reform, which cameinto effect in July 2007, on tax incidence and poverty inUruguay. The essence of the reform is the introduction of adual personal income tax, which taxes labor income atprogressive rates and capital income at lower, proportionalrates. A further modification is the reduction in therevenue share of indirect taxes. The study aims to provideinformation to inform policy discussion on distributionalimplications of tax reform. In addition, it gives impetusfor further more sophisticated analysis of current andproposed tax reforms. In designing a tax system, a trade-offexists between efficiency, equity and administrativesimplicity. The paper focuses on one aspect of thistrade-off by evaluating the equity impact of the tax reformin Uruguay. Neither the efficiency of the post-reform taxsystem nor the effect on tax administration is examined.Assessing the distributional impact of a tax reform isimportant, firstly, as there is a potential to mitigate theequity-efficiency trade-off in the design of tax structures,and secondly, as the expenditure side of the budget can thenbe employed to diminish any adverse distributional impacts.
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