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LATIN AMERICA: Taxing the Poor

Milagros Salazar

BRASILIA, Jun 2 2010 (IPS) - Not only do Latin America and the Caribbean collect less tax revenue than any other region in the world, in spite of positive economic growth this decade, but national tax systems are unfair, as they rely heavily on indirect taxes that are levied equally on rich and poor, according to a new study by ECLAC.

The tax burden in Latin America averages 18.4 percent of GDP, only half the average in the Organisation for Economic Cooperation and Development (OECD), which includes all the industrialised nations, says ECLAC (the United Nations Economic Commission for Latin America and the Caribbean).

But the average figure hides even wider discrepancies between countries. In 2008, Brazil led the region in tax receipts with 35.5 percent of GDP, followed by Argentina with 30.6 percent and Uruguay, after a 2007 reform aimed at correcting its traditional tax inequality, with 23.3 percent of GDP.

At the other end of the scale is Mexico, with tax revenues of only 9.4 percent of GDP, according to the ECLAC report titled “Time for Equality: Closing gaps, opening trails”, which was launched May 30 at the 33rd session of the U.N. regional agency, held in the Brazilian capital.

Tax receipts from exports of oil, minerals and other natural resources have risen swiftly in recent years in countries such as Bolivia, Mexico, Peru, Venezuela and Chile, but revenues from this source are volatile, according to experts.

“If the system worked better and more taxes were collected, there would be more resources to implement public policies and increase social spending,” Oswaldo Kacef, head of ECLAC’s Economic Development Division, told IPS.

Kacef pointed out that tax collection in Latin America is low compared to other regions experiencing similar economic growth.

The report says “per capita GDP expanded by 1.7 percent per year on average in Latin America (in the 19 countries studied) between 1990 and 2009, the same rate as the United States.”

Brazilian President Luiz Inácio Lula da Silva hit the nail on the head Tuesday night at the close of the ECLAC meeting in Brasilia, when he levelled criticism at some countries that have achieved significant economic growth in recent years, but have not increased social spending in line with their greater wealth because they have not tackled unjust tax systems nor improved collection.

“Where there is no tax burden, there can be no state,” he said.

ECLAC’s report indicates that less than one-third of tax revenue is collected by direct taxation, such as taxes on corporate and financial profits and personal incomes, whereas two-thirds is raised by indirect taxation, like sales tax and value added tax, which fall on rich and poor alike.

“This sort of flat-rate taxation fuels inequality and has a negative impact on redistribution, because it weighs more heavily on the poor than on the rich,” Kacef added.

The ECLAC report also compares Latin America and the Caribbean with the OECD countries using the Gini coefficient, which measures the inequality of income distribution in societies, on a scale of 0 (absolute equality) to 1 (absolute inequality).

“In OECD, the estimated Gini coefficient after taxes and transfers (used by states to redistribute wealth to low-income sectors) declines by approximately 0.15 compared with the pre-tax, pre-transfer level, while in Latin America it declines by as little as 0.02,” the report found.

“The difference in tax burdens between the OECD countries and Latin America is due mainly to the low income and property tax rates in the latter, since excise taxes (on fuels, tobacco, alcohol, and so on) are fairly similar,” the study says.

“While the corporate tax yield is comparable, the differences in income tax revenues are significant, at 0.9 percent of GDP in Latin America, compared with almost nine percent in OECD,” it adds.

“As personal income tax is the most progressive form of taxation, it may be inferred that the tax structure of the Latin American countries is more regressive than that of the developed economies, since it has an adverse effect on income distribution and is one of the reasons why Latin America and the Caribbean is one of the most inequitable regions in the world,” the ECLAC experts conclude.

Gert Rosenthal, Guatemala’s permanent representative to the U.N., said it was important for governments to act transparently and be held accountable if they decide to increase the tax burden.

In Rosenthal’s view, this is a practical way of putting on the table the ingredients needed to carry out a reform to curb inequality, without being distracted by philosophical discussions about the relationship between the state and markets.

Tax evasion is another critical problem, as several studies have shown that the rate of income tax evasion is between 40 and 65 percent.

Uruguayan Vice-President Danilo Astori said “a more just tax structure” is needed. Fiscal reform entails a focus on long-term policies, he said on the final day of the ECLAC meeting, adding that improving the efficiency of tax collection is one way of moving towards greater equity.

“Societies change by making new policies,” and governments should not be content to be remembered for economic growth rates alone, said Astori, who was responsible for tax reform in his country as economy minister in the government of former socialist president Tabaré Vázquez (2005-2010). Both are members of the leftwing Broad Front.

ECLAC forecasts average economic growth of 4.1 percent for Latin America this year, but recommends that the nine countries with the greatest inequality in the region should spend between six and nine percent of GDP to improve living conditions among the neediest segments of society.

It also highlights the need for better employment and social protection policies, to be implemented as a redistribution mechanism.

The ECLAC member countries agreed to hold their next meeting in 2012 in El Salvador. Among the items on the agenda will be promoting a social pact, with greater equality, lower social risks and greater attention to a gender perspective in public policies.