Tax progressivity is a crucial topic for Latin America-Caribbean countries since they largely depend on tax for their revenue.
For so long, economies like Latin America and the Caribbean have been inside a trap, as per the UN Economic Commission for Latin America and the Caribbean (ECLAC). The trap they mentioned was their stagnant economic growth, an average of 1% between 2015 and 2024.
There is always a light at the end of the tunnel, just like how ECLAC predicts its economic growth will increase this year to 2.4%. However, the growth rate is not as fast for an area that was underperforming for decades at this point. But what exactly can be the solution to untie from this knot?
ECLAC says the answer is increasing tax revenue and public finance by tackling tax evasion, reviewing tax expenditures, and property and wealth tax changes.
ECLAC has been eyeing tax revenue since tax revenue as a proportion of gross domestic product (GDP) was 21.5%, which has been stagnant over the recent years, just like its economic growth.
To improve the situation, a group of LAC (Latin America-Caribbean) countries created a new body for tax: the Regional Platform for Tax Cooperation in Latin America and the Caribbean (PTLAC). Its goal is to develop tax policies that are inclusive, equitable, and sustainable and promote a fair taxation policy to achieve its developmental goals.
What does such a tax system look like? Delegates in the 2023 summit developed a plan under Colombian president Gustavo Petro with support from ECLAC.
They will address the tax system’s progressivity, examine environmental taxes, assess tax benefits throughout the LAC region, and discuss digital taxation.
Tax progressivity is a crucial topic for them since they largely depend on tax for their revenue. The latest Latin America Economic Outlook report states that they get 48% of their tax from indirect measures.
The report showed that the capital income of high-income taxpayers has fewer tax burdens than labour-generated income. Taxing informal jobs like street vendors and domestic workers was challenging since half of the population was in that category. Stakeholders from the private sector stated that the government needs to simplify its tax framework to bring the informal sector workers into the tax bracket.
The working group suggested implementing wealth tax considering the current tax disparity between capital and labour income. Second, calculate the feasibility of increasing tax rates for high-income taxpayers.
The next is tax expenditures. They are government revenue losses due to tax exclusions, exemptions, and deductions.
What is the need to discuss tax expenditure? The working group revising the tax reforms wanted to evaluate the transparency in tax expenditures to avoid errors and wastage.
The working group evaluated the expenditures in seven countries: Bolivia, Brazil, Chile, Colombia, the Dominican Republic, Ecuador, and Peru.
They found that some governments rely heavily on tax revenue. In Colombia, tax expenditures contribute 8% of its GDP, while Bolivia relies less on them. The main issue is not keeping spending limits, except for Colombia, which has some quotas. As a result, one of the most important things they should do is develop techniques for estimating the costs and benefits of their investments after that determine the financial losses from those incentives.
The third is environmental taxation. They are vulnerable to climate change. So, the working groups suggested some proposals.
The most ambitious is a global corporate tax on the top 100 companies with the highest gross income.
The tax will help pay for biodiversity protection and global climate action. The second proposal is a regional multilateral carbon tax treaty. It provides a minimum floor for taxation on carbon emission activities or standardizes the tax treatment of carbon across the region. The third proposal is the most practical solution. It is creating a roadmap of best practices for eliminating fossil fuel subsidies, inspired by Colombia’s 2022 decision to eliminate its fuel subsidies.
Overall, the first year for PTLAC’s working group was mainly surveillance and stock-taking work. They must fully understand the regional tax and global dynamics before jumping into the ocean like international bodies like the Organization for Economic Cooperation and Development (OCED) and the United Nations (UN). But, PTLAC is more ambitious for its second year.
Chile, a country in South America, is preparing for the United Nations‘ international conference on development finance. All of this indicates that LAC countries will rise to glory with their economic growth.
