The Incidence of Social Spending and Taxes in Peru

Abstract

Standard tax and benefit incidence analysis is used to estimate the effects of fiscal policy on poverty and inequality in Peru. Results suggest that the extent of inequality and poverty reduction induced by Peru’s fiscal policy is small. This result is associated with low social spending rather than with inefficient spending. Most social spending components are progressive and overall social spending is also progressive. We find that direct cash transfers are well targeted and are especially effective in reducing extreme poverty in rural areas. We also find that in-kind transfers are effective in reducing inequality. Finally, direct taxes slightly reduce inequality, while, countering intuition, indirect taxes are neutral once informality is incorporated in the estimates.