Taxation and Social Justice: Who is Carrying the Burden?

1. Taxation and Social Justice: Who is Carrying the Burden? Juan C. Gómez Sabaíni Taxation and Equality in Latin America Woodrow Wilson International Center Universidad de San Andrés May 24, 2011 Washington D.C.

2. Main topics to be discussed • What do we know about the situation? • Who bears the burden? • The main reasons that explain the lack of fairness of the tax system. • Some “stones” along the road. • Finally, which must be the “path” for future reforms of the direct taxation?

3. 1. What do we know so far about the situation? Rising but insufficient tax revenues (in % of GDP) Unbalanced tax structure High levels of tax evasion In the average, 73% of income tax revenue is obtained from corporations, whereas only 27% was obtained from individuals. Most personal income tax revenue is obtained from wage earners of the private and public sectors. Taxes based on consumption (general and excise) dominate tax structures in detriment of income and property taxes.

4. Evolution of tax structure in LA

5. Some relevant data about the key tax issues in Latin America.

6. Tax structure in some world regions (2006)

7. 2. Who bears the burden? • The weight of the indirect taxes (relative to their income level) rest more heavily on the low income sectors. • The formal labour markets pay more than the informal sectors due to the withholding of taxes at source. • High income groups are the ones that mostly benefit with tax expenditures and other special treatments. • The impact of tax evasion is not symmetrical: workers evade less and they also get less benefits.

8. Distributive effects of tax systems in LA In general, tax systems in Latin America have very little impact (almost negligible) on market income distribution. This contrast with developed countries where the redistributive effects are positive and much stronger.

10. Tax evasion in VAT & Income tax

11. 3. The main reasons that explain the lack of fairness Lack of consensus about the role of taxes and income distribution Low priority to the issue of fairness Solvency was a priority? Transfer the responsibility to the expenditures side Are they substitutes? Salaries and wages are the main source of tax progressiveness and redistribution ¿What about the contributions of other sources of income?

12. Relative few tax handles in the tax structure due to the limited weight of the personal income tax, the property taxes and the indirect luxury taxes. • As an alternative many countries applied inefficient taxes on financial transactions, taxes on capital, and on gross sales. • High income tax evasion and low fiscal moral is the rule. • Generous tax expenditures and preferential treatment, specially for rents, dividends, interests and capital gains taxes, that benefits mostly to the high income groups.

13. 4. Some “stones” along the road Different opinions on the role of the personal income tax Difficulties to approve “in-depth“ reforms Lack of consensus respect the high level of income

14. Studies on VAT tax evasion are a common feature in almost all countries, but they are practically nonexistent related to the income tax, except for the 7 countries of ECLAC project (2010). • Surveys about the response of taxpayers concerning the role of direct taxes are very few and limited in scope. • Absence of detail studies about the effects on equity derived by “tax benefits or tax expenditures” given to different sources of income. • Income tax structures are technically obsolete in many LA countries in relation with international patterns and the state of the arts.

15. 4. The key is to expand “personal income TAX BASE”, in order to Increase the level of tax revenues Increase the share of direct taxes Increase the horizontal and vertical equity of the tax

16. Last but not the least… • Expand the income tax base as much as it is possible. • Applied a global or dual tax rate according with each particular situation and the international standards. • Graduate the maximum rates in order to reduce the rates for corporation and increase for personal income tax. • Improve at the maximum the compliance and reduce tax evasion of the CIT and the PIT as well. Priority must be as Musgrave said: “a high, moderately progressive tax burden can have a greater impact on the distribution of income than a low, strongly progressive one”.

17. 5. Finally, which must be the “path” for the future reforms? Emphasis on Equity, Transparency and Inclusiveness Design and implement a “long run” process of tax reforms Improve institutional capabilities, governance and rule of law Experience shows that the past reforms were not implemented in a comprehensive manner

18. Thank you very much. gomezsabaini@gmail.com

19. What should be done to overcome the obstacles? • Promote “social cohesion” is easy to say but hard to achieve, due mostly to lack of political consensus, the pressure of dominant groups and the institutional weakness –congress and justice, as well- of many LA countries. • Stress the need that tax justice must reach all people as equal, and that reforms will consider all situations as well. • The required reforms need a gradual and adaptive process in order to avoid “jumps” in the economic and social context. • To improve tax compliance and strengthen the rule of law is a “necessary” conditions in order to avoid failure of the process.

20. The results of the opinion’s surveys about tax policy in LA shows that…. • According to Latinobarómetro (2010), fiscal morality and attitudes towards taxes have shown very little improvement during the last decade. • According the WGI of the WB the “ legitimacy of the state” and the way in which it operates conditions people’s ability to see paying taxes as a legitimate duty. This is the main problem for public policy, especially in the tax area. • Between 1998 and 2009, the data show a moderate decline in “government effectiveness” for the regional average (from 49,7% to 44,4%), where some countries like Chile have achieved remarkable results (85,7%) while others exhibit a disappointing situation. • In relation to the “rule of law” indicator, Latin America shows on average a poor performance. While Chile situates in one extreme point (the positive one) with a coefficient of 87,7% in 2009, Venezuela stands in the opposite situation (the negative one) with only 2,8%.