(30 January 2008) Taxes can be increased throughout much of Latin America and the Caribbean without negatively affecting the region's long-term economic growth, according to ECLAC. A new study by this UN regional commission highlights the significant gap between tax levels in Latin America and the Caribbean and those of regions worldwide.
According to experts attending the XX Regional Seminar on Fiscal Policy, held at ECLAC headquarters in Santiago, Chile, the impact of more taxes on growth cannot be conclusively determined.
Studies from some countries do indicate a negative link between tax pressure, or public expenditure, and economic performance, whereas, in other countries, satisfactory growth is accompanied by high taxation. Still other countries exhibit mediocre macroeconomic performance despite a low tax intake.
To determine whether "adequate" tax levels and structures are in place, according to the experts, comparative data on the relation between taxes and per capita GDP is useful. For example, in 2006 taxes in Organization for Economic Cooperation and Development (OECD) countries, the world's most developed, were 36.3 points of GDP - twice the 18.4 points of GDP presented by Latin America and the Caribbean.
While disparities in per capita income must be taken into account, the potential does exist to increase tax pressure in Latin America and the Caribbean. The region overall has experienced growth over the past 10 years (except Mexico), but tax levels are beneath expected levels when compared to income levels in the region (except Brazil). And while the panorama from country to country is quite mixed, some countries present a tax resource "gap" of 3 to 4 points of GDP.
In terms of tax composition, OECD countries place greater relative importance on direct taxes and social security contributions. Latin American and Caribbean tax systems, in contrast, rely primarily on indirect taxes, with the take from direct taxes much lower than in other regions with similar rates.
Experts warn of the serious repercussions to tax system equity posed by a preponderance of regressive taxes. In this instance, the sole progressive impact of a greater tax burden is on the allocation of expenditure, which tends to be more equitable than the primary distribution of income, with the exception of general subsidies extended to fuels and public services.
One challenge to fiscal policy is to achieve modern tax systems capable of correcting the region's patterns of income distribution, which are among the most inequitable in the world. To achieve this requires a reduction in the number of tax exemptions, continued efforts against tax evasion, and, in some cases, higher taxes.
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