Juan Pablo JiménezEconomic Commission for Latin America and the

Caribbean

The political economy of tax reform in Latin America

Wilson Center. Latin American Program

December 11, 2012Washington DC

The elusive relationship between taxes and equity in

Latin America

IndexI. Motivation of the presentation

II. Characteristics of inequality in Latin America

III. The role of fiscal policy in the income distribution

IV. Potentialities and limitations of taxation as an instrument for reducing inequality

V. Conclusions and challenges

MotivationsI. Although inequality in Latin America has decreased in

recent times….

II. High inequality in distribution with a high concentration of income in the top decile

III. There is a consensus about what fiscal policy (by the expenditure side) can do to promote more equal societies…

IV. However, there remains a better understanding about what is the role of tax policy in reducing inequality

V. And better understanding of the political economy of necessary tax reform

Latin America is the most unequal region in the world …but within the region, the differences are remarkable

Gini Index in LA. Last data available

Source: CEPAL for LA and the Caribbean and World Bank, World Development Indicators for the rest

From 1990 to 2011 income inequality has been reduced in many countries…However, dividing in two periods, both trends were completely different

Latin America (18 countries): GINI Index, 1990, 2002 and 2011

Source: ECLAC

Characteristics of inequality in LA

High inequality in the distribution with a high concentration of income in the richest decile

Significant differences within the country jurisdictions (geographical inequality)

Large size of the informal economy

The ratio between the highest and lowest deciles and quintiles are higher than in any other region

LATIN AMERICA (18 COUNTRIES):INCOME DISTRIBUTION BY DECILE(Percentages and number of times)

Source: ECLAC

The redistributive capacity of fiscal policy is lower than in developed countries

LATIN AMERICA AND EU COUNTRIES: DISTRIBUTIVE IMPACT OF FISCAL POLICY (Gini Index)

Source: Goñi, E., J.H. López and L. Servén (2011), "Fiscal redistribution and income inequality in Latin America", The World Bank.

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

Argentina Brazil Chile Colombia Mexico Peru Latin America average

EU average

Gini before transfers and taxes Gini after transfers and before taxesGini after transfers and direct taxes Gini after transfers and direct and indirect taxes

The role of Fiscal Policy in the income distribution

Through public expenditure, mainly social public expenditure Level and composition

Through its financing: tax policy Level and structure

Debate between spending and revenue and their redistributional impact: while in the short term, government spending is a more

powerful instrument than the tax system; in the long run a progressive system of income taxation can

contribute significantly to reduce inequality.

The tax level has increased in almost every country. But the region is not homogeneous… differences between countries are enormous

LATIN AMERICA: TAX BURDEN (INCLUDING SOCIAL SECURITY CONTRIBUTIONS)(Percentage of GDP)

Source: ECLACNote: Central Government, except General Government for Argentina, Bolivia, Brazil, Chile, Costa Rica, and Mexico

0 5 10 15 20 25 30 35

GuatemalaMéxico

Paraguay

VenezuelaRep. Dominicana

ColombiaEl Salvador

Honduras

PerúPanamá

Ecuador

ChileBolivia

Costa RicaNicaragua

UruguayArgentina

Brasil

2008-2011 1990-1992

GRUPO 1

GRUPO 3

GRUPO 2

GRUPO 1

GRUPO 3

GRUPO 2

Porcentaje del PIB

The higher tax burden is partially explained by the fiscal reforms implemented since the early nineties

TAX REFORM IN LATIN AMERICA: 1990-2004

Source: Focanti, Hallerberg y Scartascini (2012)

Two waves of reforms with different objectives and different results Tax reforms in the

1980s Tax reforms in the 2000s

Objectives Economic efficiency Horizontal equity Increase tax revenues

Redistribution of income?

Mechanisms Expanding the tax base Rationalization of tax structure Simplification of tax administration.

Simplifying taxes Reforms in the income tax

Outcome Reduced revenues from international trade, social security and personal income tax. Significant increase in the consumption tax

Increased income and capital revenue Reduced rates on excise taxes, goods and services and on international trade Increased revenue from the exploitation of natural resources

Distributive impact

Shifting the tax burden to the middle class, increasing inequality,

Reducing inequality

Why tax policy has had so little influence on income distribution? Low and volatile tax burden

Tax burden is low when compared with relative development and other regions

Fiscal revenues depend on highly volatile non-tax revenues, especially in countries that depend on NNRR

Tax revenues are three times more volatile than in developed countries

Unbalanced structure Biased towards indirect taxes Income taxes increased, however there is a gap in the personal income

tax when compared with other regions The Income Tax is mainly based on corporations and PIT on wage-

related rents And there is high vertical asymmetry and insignificant

property taxes Narrow tax base Narrow tax base

High informality and high evasion rates restrict even more the narrow tax bases

And the widespread use of tax expenditures generates a significant revenue loss

Simplified regime

The IT has a “ progressive design” but a low impact on income distribution

DISTRIBUTIVE IMPACT OF INCOME TAX IN la

Source: Barreix, A., Bès, M. y Roca, J. (2009); Barreix, A., Roca, J. y Villela, L. (2006); Gómez Sabaini, J.C.; Harriague, M. y Rossignolo, D. (2011); Rezende, F. y Afonso, J. (2010); Roca, J. (2010); y Jorrat, M. (2010).

Colombia 2004 0.5370 0.8940 0.3570 0.4590 0.0780 0% 99% 497.0Rep.Dominicana 2004 0.5106 0.9057 0.3951 0.4759 0.0347 0% 97% -Chile 2006 0.5791 0.9677 0.3886 0.5584 0.0207 0% 99% -Uruguay 2006 0.4995 0.8630 0.3635 0.4875 0.0120 0% 92% 230.3Argentina 2006 0.4839 0.9375 0.4536 0.4738 0.0101 0% 98% -El Salvador 2006 0.5034 0.8281 0.3247 0.4947 0.0087 1% 90% 90.0Costa Rica 2004 0.5770 0.9098 0.3328 0.5692 0.0078 0% 96% 874.6Brasil 2003 0.6180 0.9243 0.3063 0.6119 0.0061 1% 94% 156.7Nicaragua 2001 0.5963 0.9441 0.3478 0.5905 0.0058 0% 94% -Panamá 2003 0.6364 0.8803 0.2439 0.6312 0.0052 2% 96% 54.0Honduras 2005 0.5697 0.9000 0.3303 0.5647 0.0050 0% 95% -Ecuador 2004 0.4080 0.8310 0.4230 0.4040 0.0040 0% 93% 311.0Venezuela 2004 0.4230 0.8400 0.4170 0.4210 0.0020 0% 100% -Guatemala 2000 0.5957 0.9115 0.3158 0.5946 0.0011 2% 93% 48.8Perú 2004 0.5350 0.5820 0.0470 0.5344 0.0007 10% 64% 6.7

Gini post impuestos

Reynolds Smolensky

PaísINDICES

Año Gini pre impuestos

Cuasi Gini impuestos

Kakwani 40% inferior

20% superior

20% sup. / 40% inf.

Quién paga el impuesto

The minimum and the maximum tax rates apply differently than in other regions

TAXABLE INCOME (as a percentage of per capita GDP) AND STATURORY TAXES (in percentages) THE PERSONAL INCOME TAX IN LATIN AMERICA AND OTHER REGIONS – YEAR 2009

Source: Gómez-Sabaíni, Jiménez and Rossignolo (2011)

Minimum Maximum PIT (minimum) PIT (maximum)

CIT

Latin America (18) 1.52 10.27 10.60 27.10 26.80

Caribbean (17) 1.47 5.99 17.50 32.10 31.10

Eas t As ia and Pa cifi c (32) 1.19 15.65 9.00 29.00 24.00

Centra l Europe a nd Centra l As ia (31) 1.08 2.16 13.30 19.40 15.80

Middle Eas t and North Africa (21) 1.21 8.60 10.40 26.00 24.90

South As ia (8) 3.22 34.17 8.60 25.70 30.40

Sub-saharan Africa (47) 2.55 19.11 10.10 35.20 30.30

Western Europe (20) 0.35 3.97 16.70 39.90 26.10

Uni ted States and Canada (2) 0.20 5.42 12.50 32.00 26.50

PIT Taxable Income (a) Shares (in percentages)

Regions

And tax evasion also decreased the narrow tax base and is higher in IT than in the VAT

ESTIMATED TAX GAP IN THE VAT AND IT

Source: Gómez-Sabaíni and Jiménez (2011)

.

.

Total Individuals CompaniesArgentina 21.2% 2006 49.7% -- -- 2005

Bol ivia 29.0% 2004 -- -- -- --

Chi le 11.0% 2005 47.4% 46.0% 48.4% 2003

Costa Rica 28.7% 2002 -- -- -- --

Colombia 23.5% 2006 -- -- -- --

Ecuador 21.2% 2001 63.8% 58.1% 65.3% 2005

El Sa lvador 27.8% 2006 45.3% 36.3% 51.0% 2005

Guatemala 37.5% 2006 63.7% 69.9% 62.8% 2006

Mexico 20.0% 2006 41.6% 38.0% 46.2% 2004

Nicaragua 38.1% 2006 -- -- -- --

Panamá 33.8% 2006 -- -- -- --

Peru 37.7% 48.5% 32.6% 51.3% 2006

Dominican Rep. 31.2% 2006 -- -- -- --

Uruguay 26.3% 2006 -- -- -- --

VAT INCOME TAX

Estimated tax gap rate Year

Estimated tax gap rateYear

Tax expenditures are higher in PIT than in any other type of tax

TAX EXPENDITURES IN LATIN AMERICAN COUNTRIES - Year 2007(in percentage of GDP)

Source: Gómez-Sabaíni, Jiménez and Rossignolo (2011)

TAX ARGENTINA BRAZIL CHILE COLOMBIA ECUADOR GUATEMALA MEXICO PERU

VAT 1.14 0.36 0.76 1.92 3.40 1.96 2.15 1.44

INCOME TAX 0.51 1.11 4.21 1.60 1.20 5.28 3.02 0.29

PERSONAL INCOME TAX - 0.66 3.31 0.24 0.80 4.35 1.56 0.19

COMPANIES INCOME TAX - 0.45 0.90 1.36 0.40 0.93 1.45 0.10

SOCIAL SECURITY 0.25 0.74 - - - - - -

SELECTIVE TAXES 0.13 0.00 - - - - - -

INTERNATIONAL TRADE TAXES 0.16 0.08 - - - 0.20 - -

OTHER TAXES 0.02 0.00 - - - 0.46 0.76 0.32

TOTAL (% OF GDP) 2.21 2.29 4.97 3.52 4.60 7.91 5.92 2.05

TOTAL (% OF TOTAL TAXES) 8.90 9.10 24.60 22.00 35.30 63.50 50.70 11.90

PIT/TOTAL TAXES TAX EXPENDITURE RATIO - 66.60 6.80 17.40 55.00 26.40 9.30

Conclusions and challenges Fiscal policy through the expenditure side had

an impact in decreasing inequality. Tax policy has a role to play But tax structure and the characteristics of

inequality in the region makes it difficult The big gap is in the personal income tax Tax reforms have to be addressed towards

increasing progressivity in order to reduce inequality: tax bases should increase and there is space to increase tax rates

Conclusions and challenges There is a virtuous circle that should be strengthened:

tax base expansion and formalization of taxpayers helps reduce tax evasion and promotes voluntary compliance enhance horizontal and vertical equity between taxpayers strengthen state legitimacy which finally will increase public confidence in public institutions.

 Working in this direction would address two of the key challenges in the region:

rebuild the "fiscal space" address the multiple dimensions of inequality in the

region.

Juanpablo.jimenez@cepal.orgEconomic Commission for Latin America and the

Caribbean

The political economy of tax reform in Latin America

Wilson Center. Latin American Program

December 11, 2012Washington DC

Thank you very much!

Breve descripción del período 2003-2011

Reducción de la desigualdad

Causas de la reducción

Características de la desigualdad en AL

Elevada desigualdad en la distribución del ingreso con fuerte concentración en el decil más rico,

Significativa importancia de la economía informal

23Fuente: Gomez Sabainii (2012() en base a Schneider, F. (2012); “The Shadow Economy and Work in the Shadow: What Do We (Not) Know?”, Institute for the Study of Labour (IZA).

Tamaño de la economía informal - Promedio 1999-2007 (promedio ponderado por PIB 2005)

La economía informal es muy alta en AL

13,4

17,1

25,127,3

34,736,4

37,6

36.000

9.488

1.2793.870

8.544 7.610

1.2540,0

5,0

10,0

15,0

20,0

25,0

30,0

35,0

40,0

Alto IngresoOECD

Mundo SudesteAsiático

MedioOriente yÁfrica del

Norte

AméricaLatina yCaribe

Europa yAsia Central

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PIB per cápita 2010 (en dólares PPP - B

anco Mundial)

Los ingresos tributarios son bajos cuando se los compara con otras regiones

COMPARACIÓN DE LA CARGA TRIBUTARIA INTERNACIONAL(En porcentaje del PIB)

Fuente: CEPAL, OECD y FMI

OCDE (30) UE (15) Estados Unidos

Asia en de-sarrollo (10)

África Sub-sahariana (9)

América Latina (19)

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

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14.7 16.1 14.9

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12.6

24.5

18.4

Carga tributaria directa Carga tributaria indirecta Seguridad social

En %

del

PIB

Y en promedio son tres veces más volátiles que en los países desarrollados

AMÉRICA LATINA Y PAÍSES DESARROLLADOS: VOLATILIDAD DE LOS INGRESOS TRIBUTARIOS (SIN SEGURIDAD SOCIAL)

(Desviación estándar)

Fuente: Jiménez y Kacef (2010)

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12.3

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América Latina Países desarrollados

La estructura tributaria se ha sesgado altamente hacia los impuestos sobre el consumo

AMÉRICA LATINA y OCDE: EVOLUCIÓN DE LA ESTRUCTURA TRIBUTARIA PROMEDIO, 1990-2009(En porcentaje del total recaudado)

Fuente: CEPAL

El IR ha crecido en forma significativa…Pero este crecimiento se basa en el crecimiento de los IR sobre sociedades

AMÉRICA LATINA: IMPUESTO A LA RENTA DE INDIVIDUOS Y EMPRESAS, 1998-2011(En porcentajes de PIB)

Source: ECLAC

0.7 0.7 0.8 0.8 0.7 0.6 0.6 0.6 0.6 0.8 0.9 0.9 0.9 1.0

2.0 2.0 2.1 1.9 1.8 1.8 2.1 2.4 2.62.8 2.8 2.8 2.5

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0.8 0.9 0.9 1.0 1.0 1.01.0

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1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Individuos Sociedades No clasificables