Spillover Adjusted Lorenz Curves and the erosion of progressive transfers policies: evidence from a Chilean VAT rebate

Abstract

We introduce a novel methodology, based on input–output techniques, to construct spillover-adjusted household redistribution matrices and Spillover-Adjusted Lorenz Curves (SALC) that capture both mechanical and spillover redistributive effects of economic policies. We apply this approach to evaluate the redistributive impact of a Value Added Tax (VAT) rebate policy – in form of a direct progressive transfer – targeted to the poorest 70% of Chilean households. Our results show that spillover effects reduce the mechanical redistributive gains of the VAT rebate by 17% for the poorest decile and by nearly 7% for the top decile. These effects become more pronounced at the top of the distribution as the policy design becomes more progressive. Ignoring spillover dynamics therefore risks overstating the redistributive potential of progressive fiscal policies.