Latin America: Fiscal policy and inequity under the microscope

(Photo: Teb/Creative Commons)

Sources: Agenda Global, Tax Justice Network América Latina, Latindadd

In Latin America in the last ten years the tax yield has increased thanks to relative stability and macroeconomic growth driven by demand from emerging countries and rising prices for prime materials, but this has not been enough to overcome the problem of fiscal sustainability. This is because of obstacles like dependence on the international context, debt service payments, ineffective management of government policies, informality and tax evasion. Another aspect is that the tax systems in the region put a disproportionately heavy burden on the poorest and most vulnerable sectors of the population. This situation will be discussed by government officials, experts and activists in Lima this week at a meeting convoked by the Latin American Network on Debt, Development and Rights (Latindadd).

Organizations like the Central American Institute for Fiscal Studies (Icefi), Poder Ciudadano (the Argentine chapter of Transparency International), Christian Aid, Tax Justice Network and the Hemisphere Group for Finance and Trade will be taking part. Among the questions to be debated on Wednesday and Thursday this week are the tax benefits awarded to big investors through trade and bilateral investment agreements and the continued existence of networks of corruption, made up of businesspeople, public officials and consultants, that serve as tax havens to conceal the profits from illegal activities, evade justice and stop paying taxes.

The meeting is entitled "Fiscal policy, growth and inequality" and it is also geared to consolidating a process of participation and active cooperation involving the public in fiscal and tax affairs. The main aim is to create a space for dialogue between Latin American governments and civil society organizations so as to widen the debate and promote proposals for progressive tax reform and to combat tax evasion, thus paving the way for the construction of societies that are more equitable, transparent and democratic.

The event will be built around three thematic panels that will discuss fiscal policy in the framework of the crisis and the main causes for concern in the fiscal and tax area. These include the relation between finance, trade and taxes, tax havens and fiscal competence, and one aim is to coordinate dialogue between governments and civil society organizations.

According to the Peruvian lawyer and journalist Carlos Bedoya and the political scientist Marìa José Romero, both from Latindadd, in an analysis of the debates in Lima published by Agenda Global, "It is true that many governments have already begun to change their tax regulations, but Latin America is still the most unequal region in the world … On average, the richest 20 percent of the population receive 56.9 percent of the income, while the poorest 20 percent only receive 3.5 percent. The countries that are most unequal are Mexico, Brazil and Argentina. This is why fiscal policy is so important when it comes to a strategy for reducing inequality.”

According to Bedoya and Romero, "The key word here is ‘progressive’ because it means that people who generate more income would pay more taxes, and that taxes on consumption should weigh less than taxes on income and personal assets. But another key aspect is the State’s capacity to negotiate with private investment, in particular foreign investment, to take a fair share. This raises the question of how transparent these enterprises’ operations are … The ideal would be to use the resources obtained in an effective way so as to build a society that is equitable and democratic."

The organizers of the Lima meeting issued a statement explaining that “Taxes are one of the main pillars of State finance and of public policies to improve people’s quality of life, but the tax burden and public expenditure have to be distributed in a fair and equitable way so they serve to promote people’s economic, social and cultural rights". But "…the tax systems in the region have always put a light tax burden on individuals and have been mainly based on taxes on consumption that are highly regressive as they place a disproportionately heavy burden on the poorest and most vulnerable sectors of society. The richest sectors, on the other hand, have the means to evade or not pay taxes by taking advantage of illicit capital flows or generous fiscal exemptions."

The organizers added that the question of tax policy has been on the agenda of governments in the region but it has not always been tackled in sufficient depth as regards evaluating the social and economic repercussions. The main approach has been an effort to increase the tax yield but other related questions have been left unresolved, like the interaction of tax policy with macroeconomic policy, the effect of taxes on savings and investment and their impact on the distribution of income.

Bedoya and Romero point out that according to a report published last year by the  Economic Commission for Latin America and the Caribbean (ECLAC), “The evolution of the tax burden (including social security) from 1990 to 2008 shows that average pressure in the region grew considerably, from 12.8 percent in 1990 to 18.4 percent in 2008. In other words, for every hundred dollars that Latin America generates only 18.4 go into the public treasury". This is in sharp contrast to the situation in the Organization for Economic Cooperation and Development (OECD), whose thirty or so members include all the countries of the rich North, where in 2007 the tax yield as a percentage of gross domestic product (GDP) was nearly double that of Latin America.

In their report for Agenda Global, the Latindadd experts comment that "To make matters worse, only one third of the yield is from direct taxes, that is to say taxes on income and patrimony. According to the ECLAC, ‘… it is no surprise that income distribution after taxes should be even more inequitable than the initial distribution'. In other words, fiscal policy is serving to generate greater inequality."

Bedoya and Romero include in their analysis the preferential treatment that countries in Latin America give to income from capital, "This is all bound up in a series of legal mechanisms like investment protection treaties, legal stability conventions and free trade treaties that are securely locked in place, and at the slightest attempt to introduce fairer rules mechanisms like the rulings of the International Center for Settlement of Investment Disputes come into play".

Some of the outstanding participants at the Lima meeting are representatives from the Ministry of Political Economy Coordination and the National Planning Board of Ecuador, the Argentine Vice-Minister of Economy, the Guatemala Tax Administration System, the Mexican Parliament, the Brazilian Treasury Secretary, the Bolivian financial system and the El Salvador Ministry of Economy. They will be discussing these subjects with specialists from the region like Oscar Ugarteche (UNAM), Roberto Bissio (Third World Institute), Aldo Caliari (Center of Concern), Martin Abeles (CEPAL), Jorge Gaggero (CEFIDAR), Martha Ruiz (Eurodad) and Evilasio Slavador (University of Brasilia).

For further information see:
Agenda de la reunión: