OECD Reports On Latin American Taxes

by Ulrika Lomas, Tax-News.com, Brussels

30 October 2008

The OECD has released its latest report questioning whether Latin American countries are maximizing the potential of their fiscal policies as a means of development.

The report, named 'Latin American Economic Outlook (LEO 2009)' published by the OECD’s Development Centre, looks into how taxation could bring about political and social development in Latin America. The OECD stresses that a fair taxation system could lead to growth and the elimination of poverty and inequality, if implemented properly and efficiently.

Fiscal policy – taxing and spending – is part of the political process and should contribute to the consolidation of democracy, the report says. LEO 2009 argues that taxes and public spending can directly attack poverty and inequality, twin problems that continue to beset the region.

According to the OECD, current social security spending is failing in its re-distributive function, and the quality of basic public goods and services such as health or education neither meets the region’s development needs nor provides a spur to citizens’ engagement with the state.

Launching the report in San Salvador, OECD Secretary-General Angel Gurría recognized the recent macro-economic achievements of Latin America but stressed the importance of re-orienting the objectives of fiscal policy towards reducing poverty and inequality in a region with some of the largest socio-economic disparities in the world.

Mr. Gurría highlighted the importance of transforming fiscal policy into a development tool in times of financial and economic uncertainty. “Fiscal systems which do little to combat poverty and reduce inequalities weaken social support for democratic processes and institutions and fail to empower the people to make the most of globalization," he said.

Key policy messages of LEO 2009 include recommendations to de-couple debt management from politics, to diversify tax sources, to improve the quality of public spending and to simplify tax systems to reduce the burden of informality, one of the key economic challenges of Latin America.

On average, revenues from personal income taxes in Latin American countries amount to the equivalent of only 4% of total tax revenues, compared with approximately 25% in OECD countries. The total “tax bite” in Latin American countries, measured in terms of the share of gross domestic product (GDP) that is levied by governments through taxation, amounts to only around 23% of GDP, compared with an average in OECD countries of around 42%.

Public spending, on the whole range of areas covered by the public budget from education and healthcare to transport infrastructures and defense, averages around 25%, compared with 44% in OECD countries, according to statistics within the report.

At present, Mexico is the only Latin American country that is a member of the OECD, and it is included in both sets of figures. OECD has invited Chile to embark on discussions that are intended to lead to its future membership, but it is not yet a member and is not included in the OECD figures.

The OECD recommends that Latin American tax systems should develop more diverse sources of revenue and become less dependent on non-tax sources and indirect taxes. In developed countries, governments have been taxing more and spending more on social benefits to offset the trend towards more inequality. Latin American governments also need to do this to support social priorities, the OECD argues.

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