# **A. Taxes and contributions**

In 2017, taxes and contributions added up to 30 percent of GDP (Table 1).<sup>5</sup> The lion’s share of these revenues came from indirect taxes (such as the value added tax or VAT). In that year, they were equivalent to about 10 percent of GDP, or more than a third of the GoU revenues. Contributions to social security account for about a fifth of the revenue, while direct taxes on personal income and contributions to the National Health Fund ( _Fondo National de Salud_ - FONASA) account for about 10 percent each. Due to limitations in data availability, we are not able to cover the full extent of these revenue-generating policies.

In this paper we utilize an accounting approach, where the starting point takes income _before_ taxes and public benefits, while including contributory pensions and subtracting contributions to the social security system. Therefore, our analysis covers the effect of direct taxes and contributions to the health system, which altogether amounted to 22.7 percent of total revenues in 2017. In contrast, we do not have information to analyze the distributive effect of indirect taxes, which represented 35.1 percent of total revenues in 2017. Additionally, we do not incorporate other taxes such as property taxes and corporate taxes, that amount to 10 percent of the total. Finally, we also do not analyze the effect of contributions to the social security system.<sup>6</sup> These contributions were 19.4 percent of total revenues.

## **Direct taxes**

The direct tax system comprises three taxes: IRPF ( _Impuesto a la Renta de las Personas Físicas_ ), IASS ( _Impuesto a la Asistencia de la Seguridad Social_ ) and FRL ( _Fondo de Reconversión Laboral_ ).

IRPF and IASS constitute personal income taxes. IRPF is applied to labor and income, while IASS applies to contributory pensions. Both were designed to achieve an equalizing effect. Altogether they represented 3.4 percent of GDP in 2017. IRPF taxes are also applied to capital income. Labor is taxed at marginal progressive rates (the highest one was 36% in 2017) and allows deductions based on contributions to the social security system, children, rent and mortgages. Capital income is taxed at a flat rate, but different rates are considered for different capital concepts, ranging from 3 percent to 12 percent. The IASS taxes contributory pensions at progressive rates and does not allow deductions. Finally, the purpose of FRL is to support a fund for programs aimed at enhancing labor productivity. In 2017, FRL was applied through a tax on labor income at a rate of 0.125 percent, paid by employees (including self-employed), plus a rate of 0.125 percent paid by 5 GDP was estimated at 56.157 billion USD, equivalent to 16,245 USD per capita in 2017 (WDI accessed on June 27, 2019).

6 Indirect taxes such as the value added tax can be typically observed in household consumption expenditure surveys. In Uruguay, the latest survey of this kind was conducted in 2016, but the microdata and reports have not been made public. Similarly, property taxes are not available. Corporate taxes cannot be directly imputed into households and thus are not part of the fiscal incidence analysis. Finally, contributions to the social security system are not analyzed separately because behavioral responses to changes would be strong, and these cannot be accurately captured within the current accounting approach. Additionally, contributory pensions represent a large portion of government revenues, and any adjustment would also lead to changes in macroeconomic and public accounts, which are not considered here.

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