Besides sub-Saharan Africa, there is no other region of the world in which less taxes are collected than in Latin America. The negative effects this exerts on fiscal policy and lost GDP growth are significant.
Take the region’s largest economy Brazil whose tax code is more than 30,000 pages long. For years, a high and complex tax burden has given would-be investors the jitters. The administration of president Jair Bolsonaro originally made tax reform a key part of the government’s policy agenda, alas it is being increasingly side-lined.
The new administration in Chile led by president Gabriel Boric similarly made tax reform a key part of the governing coalition’s campaign. Unlike in Brazil, congressional pressure from influential socialist blocs means this is one area that the administration is unlikely to be able to kick into the long grass.
Earlier this month, finance minister Mario Marcel announced a tax reform project which aims to tackle structural reforms in the financial system whilst increasing health and pension payments. Notably, the reform seeks to restructure income tax by creating a modern semi-dual system, stimulating the business environment.
An adviser to Chile’s central bank explained, “The discussion on tax reforms has extended over several presidential periods. There have been several important reforms to the system but leftist criticism has derided the system for being too oriented toward the middle class. An important part of the tax discussion has been about the “exemptions” that have been considered regressive across the political spectrum.”
“The discussion on tax reforms has extended over several presidential periods. An important part of the tax discussion has been about the ‘exemptions’ that have been considered regressive across the political spectrum.”
Adviser to the central bank, Chile
Across the rest of Latin America, several administrations are considering similar exemptions. However, an analyst at a Chilean investment bank warned that, “ … many exemptions are beneficial for the economy in general and for the population, for example, lower fuel prices and lower transport and food costs.”
Indeed, exemptions can spur economic dynamism, but they also add further complexity to a system already extremely complex.
In other regions of Latin America, reform is also on the cards an Argentine economist and former undersecretary of finance explained, “In Colombia, new president Gustavo Petro is looking to progress tax reform which seeks not only to expand the tax base but also to increase VAT and to implement wealth taxes – the latter of which is unlikely to be green-stamped by the conservative-dominated congress.”
“In Colombia, new president Gustavo Petro is looking to progress tax reform which seeks not only to expand the tax base but also to increase VAT and to implement wealth taxes – the latter of which is unlikely to be green-stamped by the conservative-dominated congress.”
Economist and former undersecretary of finance, Argentina
Here, Petro’s ability to appeal to a broad range of factions will be put to the test.
Naturally in Colombia, as in Chile and Peru, administrations – even those of the left – know they cannot go too far in promoting tax reforms that could provoke a serious backlash from the private sector. Unlike in poorer countries such as Paraguay and Bolivia, the region’s major economies derive a significant chunk of fiscal revenue from the top tranche of income earners.
Unsurprising then, that Chile experienced significant capital flight in the wake of Boric’s victory and thus far foreign direct investment in the country has stagnated. A lesson to be learned – populist tax reforms may go down well with an electorate focused on reducing socio-economic inequalities, push too far and private capital will flow elsewhere – not a choice Latin America wants to be facing amidst economic slowdown, inflation and soaring fiscal deficit. Across Latin America, tax remains regressive and antiquated.