Wednesday 23 June 2021

Why Do The Rich In Latin America Pay Much Less Tax Than The Rest?

The data are overwhelming: Latin America's rich pay less taxes than those in developed countries.
The data is overwhelming: Latin America’s rich pay less taxes than those in developed countries.

The filtration of millions of documents Panamanian firm Mossack Fonseca, called Panama Papers, has exposed the maneuvers of rich and powerful around the world to hide money and evade taxes.

As far as taxes are concerned, figures from various international organizations show that the contributions of the wealthiest people tend to be low relative to the amount of their wealth.

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In the region the richest 10%, owns 71% of wealth and taxed only 5.4% of their income,
according to a new report by the United Nations Economic Commission for Latin America and the Caribbean (Cepal).

In some countries, the wealthiest pay between 1% and 3% of gross income, while in others the percentage climbs to 10%. But the trend is clear when compared with the developed world. (See the chart below on the share of income taxes paid by the richest countries).

effective rate of income tax paid by individuals 10% (decile) richest people in different countries. Source: Cepal, 2016
Efective rate of income tax paid by individuals of the 10% (decile) richest people in different countries. Source: Cepal, 2016

In the United States, the contribution of the more affluent is 14.2%. And in some European countries exceeds 20%.

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Ricardo Martner, head of the Unit of Fiscal Affairs of the Cepal, tells the BBC that this imbalance is particularly important among the regional and global economic problems. “At the time of boom this issue could have less urgency. Now with the crisis, difficulty with debt, with the difficulty of creating resources is an issue that requires a much clearer solution,” said Martner.


Regressive tax structure

Tax revenue that finances public spending is based on direct taxes (income and property) and indirect (consumption).

Most of the taxes collected in Latin America come from consumption, not income.
Most of the taxes collected in Latin America come from consumption, not income.

he first favor equity under the principle that more is more pay, while the consumption tax, also called value added or IVA is based on exactly the opposite principle: the rich and poor pay the same tax added the price of a product, something that critics considered unfair or “regressive”.

While tax revenues grew more than 42% over the last 25 years in Latin America and now stands at 21.7% of gross domestic product (GDP), which is a record, the reality is that only a third this tax burden is based on income taxes.

“The increase in revenue has followed this pattern. There is a greater tax burden, but most comes from increases in VAT,” says Ricardo Martner, Cepal.

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In recent years they have sought reforms to strengthen the income tax both corporations and individuals, but much remains to be done. “

Tax Evasion

In this structural deficiency of the tax system other “chronic” problem is added.
With an army of accountants and exclusive law firms available with an international financial network of tax havens, corporations and millionaires are masters in this area.

The Panama Papers laid bare the rich and powerful maneuvers to avoid paying taxes.
The Panama Papers laid bare the rich and powerful maneuvers to avoid paying taxes.

The Panama Papers maintain in check more than one government at the regional and global level, is a clear example of this financial-legal labyrinth.

According to ECLAC, evasion of taxes on personal, corporate and income tax costs Latin America and the Caribbean more than US$320 billion per year, ie 6.3% of GDP.

A study by Global Financial Integrity, an organization based in Washington, US, found last year that three Latin American countries are among the 15 nations with more illicit flows of the world: Mexico, Brazil and Venezuela.

In Mexico, revenue comes mainly from oil.
In Mexico, revenue comes mainly from oil.

In these irregular transactions involved not only millionaires who seek to hide their fortunes to pay less to the Treasury, but also multinationals, according to Global Financial Integrity, are the main causes of these flows, through under-invoicing of exports.

In this context, Jorge Gaggero, a member of Tax Justice, an international network for fiscal justice, distinguishes three types of countries at regional level.

“In countries like Mexico and Venezuela, the rich are not taxed so relevantly because the revenue comes from oil, which ends up being a source of tax evasion.

“In the Central American nations it can be said that the rich govern for themselves, something that is reflected in the tax structure.

“And Brazil, Argentina, Chile, Uruguay, Bolivia and Ecuador are the countries that have advanced further, but have not resolved the tax inequality and the high levels of evasion”,  Gaggero told the BBC.

The specialist points out that the key is politics.

“There are countries that govern sectors of economic power, but even those who do not directly exercise power have the ability to block any process of progressive reforms of some relevance,” said  Gaggero.


1. Growing fiscal deficit

In lean times, the average fiscal deficit is on the rise in Latin America last year was 3%.

The rich are not the only ones responsible for this situation. The alarming levels of regional labotr informality and falling prices of raw materials have also impacted revenue.

The reality is that all contribute to the underfunding of a state that spends much less on health, education and social than those of developed countries programs.

Social spending, which rose from US$801 per capita in the early 1990s to US$1,841 in 2013-2014 has fallen or has been on a plateau, and hides strong differences in different countries.

In Bolivia, Guatemala, Honduras and Nicaragua does not exceed US $ 300 per person, while in Argentina, Brazil, Chile, Costa Rica and Uruguay borders or exceeds US$2,000 per head.

“The fiscal deficit is creating a spending restraint and reducing subsidies to the poor people,” says Ricardo Martner, of Cepal.

One of the most dramatic examples of this reduction in subsidies has been seen in Argentina, with the new government of Mauricio Macri. The president has slashed public spending and at the same time has increased several times the cost of electricity, transportation and other basic services.

2. Inequality

In the European Union the so-called Gini coefficient, which measures inequality, has seen a decline of 11.6% due to income tax.

Money invested in social programs has declined in Latin America.
Money invested in social programs has declined in Latin America.

In comparison, Latin America has only reduced inequality by 2.1% through the collection of this tax.

With the fat cows turn of the century, the Cepal recorded a significant drop of the Gini that rose from 0.507 to 0.491, with significant variations in nine of the 16 countries measured, especially Uruguay (reduction of 2.7% per year), Argentina ( -2.3%) and Ecuador (-2.2%).

Translated and adapated from – ¿Por qué los ricos de América Latina pagan mucho menos impuestos que el resto?

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We strive for accuracy in its reports. But if you see something that doesn’t look right, send us an email. The Q reviews and updates its content regularly to ensure it’s accuracy.

"Rico" is the crazy mind behind the Q media websites, a series of online magazines where everything is Q! In these times of new normal, stay at home. Stay safe. Stay healthy.

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