The debate returns to the need for the region to address structural fiscal reforms, that is, the transition towards modern, progressive tax systems aimed at rebalancing the distribution of wealth.
Foto: Diego Marín
Latin America has been one of the regions hardest hit by the COVID crisis, presenting some of the highest mortality rates in the world. However, this crisis has not been limited only to the health field, but has gone further in its impact, hitting the main economic and social indicators hard. As the ECLAC has pointed out, if strong fiscal measures are not applied, it could take a decade for the region to regain pre-crisis income levels, thus perpetuating unacceptable levels of poverty and inequality in the region.
Although at first Latin American governments applied significant counter-cyclical measures aimed at preserving the productive framework and social protection, in a second phase they appealed to international organisations as the appropriate tools to make up for the region’s lack of resources. However, although international organisations have made some efforts in this regard, such as partial debt forgiveness, the development of new lines of soft credit or the issuance of Special Drawing Rights (SDR) by the IMF, these measures are insufficient both because of their scope as well as the amounts available, especially for the largest economies in the region.
Once the multilateral route has been exhausted, the debate returns to the need for the region to address the eternally postponed structural fiscal reforms, that is, for Latin American countries to decisively address the transition towards modern fiscal systems which are progressive and oriented towards rebalancing the distribution of wealth. Ultimately, it is about equity being centre stage in Latin American development models and in such a way that it promotes economic recovery. These structural reforms should address the two main areas of fiscal policy: spending and revenue.
In tax matters, there is a broad consensus on the need to organise national and international strategies to combat tax evasion and avoidance, which represents around 6% of the region’s GDP. Likewise, considered essential is the creation of new tax prototypes such as comprehensive corporate tax, the consolidation of personal income tax, extending the scope of taxes on wealth and property, advancing taxes on the digital economy and strengthening associated corrective taxes associated with public health (such as taxes on alcohol and tobacco) and with the environment (such as taxes on carbon).
Intrinsically related to tax evasion and avoidance, the so-called “Pandora Papers” have recently come to light, an investigation carried out by the International Consortium of Investigative Journalists (ICIJ) which reveals, at global level, the illegal, and also legal, movements of huge financial amounts in order to hide income and assets through opaque operations and tax havens in order not to pay the corresponding taxes or significantly reduce the amount thereof. Tax evasion and avoidance operations such as those revealed by this investigation, which concern a significant number of public figures with great power and influence (government officials, politicians, athletes and artists, among others) and span the five continents, reduce substantively the amount of public revenues that countries collect, while at the same time as reducing the confidence of citizens in their governments and institutions, affecting people’s commitment to paying taxes.
Decrease in tax revenue often entails the need to increase the tax burden via indirect taxation, especially in developing countries, which contributes to consolidating regressive tax systems. On the other hand, by reducing public revenues, public spending is reduced, which inevitably widens the inequality gap, undermining social cohesion. In this context, cooperation in tax matters between the different countries, led by the Tax Administrations, and especially the international exchange of information for tax purposes, is revealed as a fundamental strategy to combat evasion and avoidance on a large scale.
Regarding public spending and investment, it is necessary to move away from an orthodox approach focused on containing spending and the main macroeconomic variables and to focus on a new approach that places public spending as a key lever for development. In this framework, public spending must have two key functions, first, to boost domestic demand in the context of economic recovery, and second, to promote the transition from economies with low added value to industrial and service sectors with high levels of productivity and competitiveness, and therefore with substantial and generalised wage improvements. This transition must also be made considering three cross-cutting elements of great importance in the new framework of global competitiveness, such as digitisation, environmental sustainability and the incorporation of gender issues.
Putting into practice some of these approaches has been tried in different countries of the region, that is, their adoption is not a problem of lack of technical capacities or political will. But what experience shows us is that there is significant resistance within the framework of the political economy of each country, especially linked to certain sectors of economic and political power. Overcoming this resistance therefore requires working not only from the fiscal sphere but also addressing fiscal reforms from a broader perspective of the power game within the framework of democratic governance and the new social pacts that the region must face.
