Latin America must define a fiscal policy framework that allows the social progress made to date to be sustained and extended as far as possible.
Image: Last protests in Chile. Author: Iván Alvarado (Reuters)
Despite progress in reducing inequality in Latin America, this remains the continent with the highest income inequalities in the world. In the present context of economic slowdown, the region must define a fiscal policy framework that will allow it to sustain the social progress achieved to date and, as far as possible, to go further. International empirical evidence is increasingly conclusive on the importance of redistribution, not only as a vehicle to achieve greater equal opportunities, but also to maintain democratic stability and economic growth.
Inequality has become one of the key issues on the new global agenda. Headlines like The world’s 26 richest people own the same wealth as 3.8 billion of the poorest head the front pages of the world’s most influential newspapers. However, the reality hides a greater complexity. The data show that, in fact, global inequality has decreased in recent decades, mainly thanks to the development of China and India, but also that in many countries it has increased, especially in developed countries.
To face the challenges of inequality, multiple proposals have emerged that point to the need to enhance and modernise public instruments of redistribution. The most renowned author is currently Thomas Piketty, who began his crusade against inequality with the publication in 2013 of his book Capital in the 21st Century, recently followed by the 2019 publication of Capital and Ideology. In both works, with a formidable statistical analysis, the growing inequalities in the distribution of income and wealth in a wide range of countries are verified and a series of transgressive proposals are made to correct them, in both the spheres of tax and public expenditure.
In the tax field, we must highlight the work of economists such as Emmanuel Sáez and Gabriel Zucman, authors of the recent book The Triumph of Injustice: How the Rich Dodge Taxes and How to Make Them Pay, who have pointed out the regressive elements in the American tax system, in which a Ford worker is taxed on personal income at the same level as Warren Buffet, one of the richest men in the country. Along these lines, the authors make novel proposals to reform the tax on personal wealth, to increase corporate income tax and personal income tax, and to make changes in consumer taxation in order to put the United States back at the forefront of progressive tax scaling.
In the area of public spending, international organisations insist that redistributive policies are positive for growth and economic stability in the medium and long term. In other words, the dichotomy between public spending and economic growth, present in the economic policy recommendations of the 1980s and 1990s, would thus be replaced by a new approach, focused on identifying the optimal level of public spending and the impacts distinguished by their composition. There is a growing consensus that with a scenario like the present low interest rates, the potential impact of fiscal multipliers increases, and that spending programmes that act as automatic stabilisers or public investment play a key role as countercyclical mechanisms. As for the composition of the spending, improving its social effectiveness requires its adequate orientation towards areas such as infrastructure, education, social protection and R&D.
Here it should be noted that Latin America is the only region in the world that has not suffered from this phenomenon of growing internal inequality. In fact, in recent decades it has made a notable effort to reduce it, taking advantage of the commodity boom. As the ECLAC points out, this decrease in income inequality has been produced by the increase in the prices of basic products, the greater drive to redistributive policies and the strengthening of labour institutions such as the minimum wage or collective bargaining. However, these efforts are insufficient, as the data also show that the region remains the most unequal in the world.
From the programme EUROsociAL+, funded by the European Commission and led by the FIIAPP, we join in this task of promoting redistributive mechanisms in the region. The programme has just published the working document The redistributive impact of Latin American tax systems and their comparison with the European Union and the OECD, authored by professors Jorge Onrubia of the Complutense University of Madrid, and María del Carmen Rodado, of the Rey Juan Carlos University, with a foreword by Danilo Astori, former Uruguayan Minister of Economy and Finance.
The study’s conclusions point out that fiscal policy in Latin America and the Caribbean fails to reduce inequality at the same rate as the OECD due to its limitations in progressiveness and tax pressure. Thus, the redistributive effect of direct taxes and monetary allowances is considerably greater in the countries of the European Union than in the countries of Latin America and the Caribbean. It therefore seems that the efforts of the region should reinforce progressive taxation and the improvement of internal capacities in tax collection, in combination with the improvement in the quality and composition of “prosocial” public budgets.
It is not an easy task, and less so in an environment of economic stagnation, but it is necessary to preserve the social achievements of the last decade.
In: Planeta Futuro, El País
Authors:
Jorge Onrubia Fernández is lead teacher of Public Finance and Tax System, Faculty of Economic and Business Sciences, Complutense University of Madrid, and a researcher attached to the Complutense Institute of International Studies (ICEI).
María del Carmen Rodado is a contracted teacher, doctor in Applied Economics, Faculty of Legal and Social Sciences, Rey Juan Carlos University
Fernando de la Cruz Prego is responsible for public finances of the EUROsociAL+ Programme of the International and Ibero-American Foundation for Administration and Public Policies
