The elusive relationship between taxes and equity in Latin America

1. The elusive relationship between taxes and equity in Latin America Juan Pablo Jiménez Economic Commission for Latin America and the Caribbean The political economy of tax reform in Latin America Wilson Center. Latin American Program December 11, 2012 Washington DC

2. Index • Motivation of the presentation • Characteristics of inequality in Latin America • The role of fiscal policy in the income distribution • Potentialities and limitations of taxation as an instrument for reducing inequality • Conclusions and challenges

3. Motivations • Although inequality in Latin America has decreased in recent times…. • High inequality in distribution with a high concentration of income in the top decile • There is a consensus about what fiscal policy (by the expenditure side) can do to promote more equal societies… • However, there remains a better understanding about what is the role of tax policy in reducing inequality • And better understanding of the political economy of necessary tax reform

4. 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 theCaribbean and World Bank, WorldDevelopmentIndicatorsfortherest

5. 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

6. 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

7. 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

8. 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.

9. 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.

10. 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: ECLAC Note: Central Government, except General Government for Argentina, Bolivia, Brazil, Chile, Costa Rica, and Mexico

11. 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)

12. Two waves of reforms with different objectives and different results

13. 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 • TheIncomeTaxismainlybasedoncorporations and PIT onwage-relatedrents • 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

14. 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).

15. 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)

16. 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) . .

17. 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)

18. 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

19. 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.

20. Thank you very much! Juanpablo.jimenez@cepal.org Economic Commission for Latin America and the Caribbean The political economy of tax reform in Latin America Wilson Center. Latin American Program December 11, 2012 Washington DC

21. Brevedescripción del período 2003-2011 • Reducción de la desigualdad • Causas de la reducción

22. Características de la desigualdad en AL • Elevada desigualdad en la distribución del ingreso con fuerte concentración en el decil más rico, • Significativaimportancia de la economía informal

23. La economía informal es muy alta en AL Tamaño de la economía informal - Promedio 1999-2007 (promedio ponderado por PIB 2005) 23 Fuente: 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).

24. Los ingresostributarios son bajoscuando se los compara con otrasregiones COMPARACIÓN DE LA CARGA TRIBUTARIA INTERNACIONAL(En porcentaje del PIB) Fuente: CEPAL, OECD y FMI

25. Y en promedio son tresvecesmásvolátilesque en los paísesdesarrollados AMÉRICA LATINA Y PAÍSES DESARROLLADOS: VOLATILIDAD DE LOS INGRESOS TRIBUTARIOS (SIN SEGURIDAD SOCIAL)(Desviación estándar) Fuente: Jiménez y Kacef (2010)

26. La estructuratributaria se ha sesgadoaltamentehacia los impuestossobre el consumo AMÉRICA LATINA y OCDE: EVOLUCIÓN DE LA ESTRUCTURA TRIBUTARIA PROMEDIO, 1990-2009(En porcentaje del total recaudado) Fuente: CEPAL

27. El IR ha crecido en forma significativa…Peroestecrecimiento se basa en el crecimiento de los IR sobresociedades AMÉRICA LATINA: IMPUESTO A LA RENTA DE INDIVIDUOS Y EMPRESAS, 1998-2011 (En porcentajes de PIB) Source: ECLAC