down to prevent overestimation bias.<sup>16</sup> Regarding indirect taxes, it is assumed that they are paid entirely by the consumers, and their estimation is based on the EPF which is used to calculate, by consumption decile, the shares of consumption spent on indirect taxes. Since these shares must be imputed to each individual’s disposable income in the corresponding consumption decile, it is necessary to rank individuals in the CASEN by consumption decile which requires both the CASEN and EPF surveys to interlock.

The estimation of indirect taxes in the EPF and the survey-to-survey imputation follows the hot-deck procedure used by Larrañaga et al. (2012) in their tax-benefit microsimulation model for Chile. In order to avoid a potential overestimation of the actual VAT rate paid and to be consistent with the CEQ methodology, a distinct feature in the treatment of the VAT between that microsimulation model and the incidence analysis presented in this paper is that the latter does not use the statutory rate (19 percent), but the effective rate (14.3 percent) which is based on the estimate of evasion (24.5 percent) in 2013.<sup>17</sup> For the estimation of the VAT, the analysis considers fiscal exemptions, being the most important those on health, education, insurance and financial operations, gambling, and cultural services. It also considers special sale taxes such as those on alcoholic and nonalcoholic beverages, and excise taxes such as those on tobacco and fuel.

The last income concept, _final income_ , is constructed by adding the monetized value of in-kind transfers on education and health and by subtracting the corresponding copayments and fees for the use of such services to/from consumable income. For both education and health, the allocation method is imputation. In the first case, the CASEN allows to identify who attends an educational institution, the educational level attended, and the financing scheme of the institution —i.e., public, subsidized or private—, so that it is possible to impute the average cost of education disaggregated by level of education, financing scheme and, in the case of tertiary education, if the benefit is either received by the institution or the student. If the student is the recipient, the imputation is disaggregated by benefit, scholarship or credit, with the latter considering only the fee paid for the credits bought by the government under the _Crédito con garantía estatal_ scheme (credit guaranteed scheme). In the case of health, the CASEN identifies who is affiliated to FONASA, DIPRECA or CAPREDENA systems, so that the analysis imputes the average cost based on the use of health services.

The assessment presented in this paper offers the most comprehensive tax-benefit incidence analysis available for Chile to date, and allows for the results to be comparable with other developing countries applying the same methodology. Yet, the results presented are point-in-time and do not account for behavioral, general equilibrium, or lifecycle effects, therefore overlooking the long-term effects of fiscal policy on wellbeing indicators. In addition, the analysis acknowledges the potential presence of measurement errors due to under-reporting of certain income categories and under-sampling of the top incomes in the household surveys.

The evidence presented in the next section, as mentioned before, corresponds to the scenario that considers contributory pensions as deferred income instead of as government transfer, and for

> 16 For a detailed description of the scaling down procedure, see Higgins and Lustig (2017).

> 17 The magnitude of VAT evasion was estimated by Chile’s Internal Revenue Service (Servicio de Impuestos Internos, 2015).

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