JUAN PABLO JIMÉNEZ AND ISABEL LÓPEZ AZCÚNAGA The Next Step in Improving Equity: Tax Reform
bases in the region, especially for income
taxes. These deductions represent more
than 2 percent of GDP in several countries
and reduce tax collection, affecting equity across a range of taxpayers who may
earn the same amount but pay starkly different rates. 3
Low levels of tax compliance and high
rates of evasion are also significant obstacles to achieving more redistributive tax
policies in the region. Tax avoidance not
only impedes fiscal development and balanced growth, but erodes the perception of
fairness within the tax system.
A study by the Economic Commission for
Latin America and the Caribbean showed
that the average evasion rate of VAT ( 27. 6
percent) in the region is lower than income-tax evasion rates. Nicaragua has the
highest rate ( 38. 1 percent) and Chile has the lowest ( 11.0
percent). 4 In this case, evasion rates are not very different from estimates for the EU.
However, income-tax evasion rates are much higher
( 51. 4 percent) than other regions—adding to a larger overall rate of tax evasion. Ecuador and Guatemala had the
highest rates of income tax evasion ( 63. 8 percent and
63. 7 percent, respectively), and El Salvador the smallest
( 47. 4 percent). Overall corporate and personal income tax
evasion in Latin America totaled 54. 2 percent and 46. 8
percent, respectively. Compare that to European countries where the corporate tax evasion rate is 28. 7 percent
and the personal income tax evasion rate is 33 percent. 5
In a region often known for weak institutions, fiscal institutions are particularly hampered. The weakness and limitations are best reflected in the public’s
low levels of support for paying taxes and reforming
the system. On average, Latin American citizens are almost three times more likely to justify tax evasion ( 20
percent) than their fellow citizens in OECD countries
( 7 percent). And only 34 percent of respondents in Latin
America believe that avoiding taxes is always bad—in
contrast to 62 percent in the OECD countries. 6
On average, Latin American citizens
are almost three times more likely
to justify tax evasion ( 20 percent)
than their fellow citizens in
OECD countries ( 7 percent).
imperative. In pursuing this aim, governments need to
use all the economic policy tools at their disposal efficiently, including taxation and public spending.
To promote greater social equity through more efficient social spending, governments need stable and consistent tax revenue. This also means avoiding reliance
on indirect taxes, which tends to place the burden of
taxation on the middle and lower segments of society.
It is precisely for this reason that particular attention
needs to be paid to the design and structure of the tax
system. Individual countries in Latin America face different limitations in terms of tax structure and its effects on
equity. Within those differences, the region has a significant space to improve its redistributive capacity through
an equitable tax policy that can simultaneously widen
tax bases and raise marginal tax rates.
Doing so in a way that adheres to fundamental notions of justice and fairness will also help improve Latin
America’s abysmal levels of tax compliance—as will the
effective, honest and transparent investment of those
resources in the public interest.
Government Responsibility and
Latin American countries are not the globe’s poorest, but they have the greatest disparity in wealth and income distribution. Designing public policies to
improve social equity is both a moral and a development
Juan Pablo Jiménez is head of the Fiscal
Studies Area at the Economic Development
Division of the Economic Commission for Latin
America and the Caribbean (ECLAC). Isabel
López Azcúnaga is a consultant at ECLAC.
FOR SOURCE CITATIONS SEE:
141 Americas Quarterly SPRING 2012