**cost.** The fact that several redistributive policies could lead to substantial fiscal savings opens important potential to maximize the inequality reducing impact through effective use of these resources.  That said, it is important to emphasize that improving the progressivity of public transfers can also go far in reducing income inequality.

68. **An illustrative policy package combining three policy options could be sufficient to achieve levels of inequality similar to Chile and Costa Rica.** The proposal includes: (1) reductions of personal income tax exemptions, (2) reductions in most exemptions/exclusions of the value added tax, and (3) taxation of pension income. The initial impact of this proposal would yield a substantial fiscal saving (2.4 percent of GDP), which could be used to finance the introduction of a tax declaration of independent workers (0.5 percent of GDP) and an expansion of the conditional cash transfer program (1.9 percent of GDP), yielding an estimated reduction in the Gini coefficient of 4.6 points. In that case, Colombia‟s Gini coefficient would be lower than Chile and close to that of Costa Rica.

69. **The proposed reform package is illustrative of the substantial unexploited potential of fiscal redistribution in Colombia, but should not be interpreted as a specific policy recommendation.** Further analytical work would be necessary to identify all available policy options, including new programs and improved progressivity of existing ones, and select the most optimal ones. Additional household survey simulations would be needed to confirm the accuracy of the estimates presented here.

70. **Further analytical work is recommended to derive specific policy recommendations.** On the taxation side, the most obvious missing information relates to the redistributive impact of payroll taxation, including the effects of a social security financing reform. A better understanding of the behavioral responses to changes in taxation or spending is also warranted. The World Bank has previously worked with the UK Institute of Fiscal Studies (IFS) to design a model (MEXTEX) which examines the impacts of fiscal reforms on efficiency and equity in the case of Mexico, and this approach could usefully be adopted to Colombia. Improved access to anonymous tax payer data would also go a long way in improving our understanding of the dynamics of top earners and the implications for the distribution of income. In addition, little is known about taxes different from personal income and value added taxation, such as financial transaction, wealth and fuel taxes. On the expenditure side, there is a need for further information about a few specific programs, including agriculture.

71. **Finally, a political economy analysis to examine the feasibility of the proposed fiscal redistribution package would also be useful.** This paper has deliberately avoided the critical issue of the degree to which the proposed policy measures can be implemented given existing political economy and legal constraints that Colombia is facing. An evidence-based analysis such as the one presented here, however, would be a useful starting point for such an analysis.

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