Retrospective on Kathryn E. Bahner, “Peruvian Tax Reform: Increasing Government Revenues and Social Equality” from Leveraging Peru's Economic Potential Perspectives on Business and Economics, Volume 35, 2017 Kathryn E. Bahner ‘17 is now an auditor with KPMG, LLP. Bahner discussed that Peru’s tax system raised insufficient revenue due to widespread tax evasion and a large informal sector. She suggested that increasing corporate taxes, adjusting the VAT, and creating a higher income tax bracket for the wealthiest households could help. She predicted that these measures would boost government revenue and reduce social inequality. How effective have Peru’s recent efforts been in formalizing the informal sector and reducing income-tax and VAT evasion, and which policies or enforcement measures have actually driven changes in government revenue? Bahner argued that Peru’s large informal sector and low tax compliance limited the government’s revenueraising capacity, and she warned that over-reliance on enforcement could hurt poorer Peruvians. Since then, Peru increased its corporate income tax rate from 28 percent to 29.5 percent in 2017 (Oxford Business Group, 2017). However, structural issues persist: informality remains widespread, with more than 70 percent of workers in informal employment, according to the OECD (OECD, 2025). The OECD’s analysis also highlights that Peru’s tax system is fragmented, with multiple smallbusiness tax regimes that encourage firms to remain informal and contribute to weak compliance (OECD, 2023). Additionally, VAT non-compliance is estimated to cost Peru about 2.6 percent of GDP. And, lack of regulation, tax administration, and information systems has led to corporate tax evasion that deprives the government of around one-third of potential tax revenue, according to the OECD (OECD/GRADE, 2023). These persistent shortfalls suggest that Peru’s policy measures have only partially addressed the underlying issues Bahner highlighted. Enforcement initiatives have not produced major gains in formalization or compliance, and the state still faces structural barriers to expanding the tax base and increasing revenue. How have changes to Peru’s VAT, corporate tax, and personal income tax rates affected revenue generation and social equality, particularly for lower-and middle-income households, and have new measures targeting the wealthiest households achieved the predicted reduction in inequality? Bahner predicted that cutting VAT, increasing corporate tax, and introducing a new top income-tax bracket would increase revenue and reduce inequality, helping Peru make progress toward economic transition. In practice, although there was a proposal to cut the standard VAT rate from 18 percent to 17 percent in 2017, the measure was contingent on revenue targets and was not broadly implemented as a permanent cut (Oxford Business Group, 2017). Meanwhile, the corporate tax rate was raised to 29.5 percent (Oxford Business Group, 2017). On inequality, according to World Bank–OECD data Peru’s Gini coefficient fell from about 43.6 in 2016 to around 40.3 by 2022, indicating a more even distribution of income (OECD, 2024). Nonetheless, much of this reduction appears to stem not directly from tax reform but from economic growth and expanded social transfers (OECD, 2023). As such, while some of the tax changes Bahner anticipated were implemented, their redistributive effect appears limited; broader macroeconomic and social-policy dynamics have played a larger role in shaping inequality trends. References OECD. OECD Economic Surveys: Peru 2023. OECD Publishing, 2023. OECD. OECD Economic Surveys: Peru 2025. OECD Publishing, 2025. OECD/GRADE. Towards Universal Social Protection in Peru: Challenges and Possibilities, 2023. OECD. Latin American Economic Outlook 2024: Financing Sustainable Development. OECD Publishing, 2024. Oxford Business Group. “The government of Peru introduces new tax package,” Peru 2017. Retrospective by Vini Jaiswal ‘ 26, B.S Industrial and Systems Engineering Martindale Retrospectives 6 December 2025
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