July 31, 2008
It's official: Latin Americans pay fewer taxes than people in almost any other region of the world.
Two new studies by the United Nations Economic Commission for Latin America and the Caribbean (ECLAC) say that Latin American governments' tax collection is not only way below that of the world's 30 most industrialized countries, but also lower than that of Southeast Asia and Africa.
OK, I know, many of you are chuckling by now, and saying, ``Oppenheimer, you have discovered the existence of lukewarm water! Don't you know that tax evasion has been one of Latin America's most popular sports for ages? Did you ever ask yourself where the money for those luxury Miami condos is coming from?''
Granted, economists have long singled out Latin America's low levels of tax collection. They have attributed it mostly to the benign treatment of government cronies, generalized tax evasion (rooted in the widespread belief that corrupt officials will steal your tax money anyway), and to a huge underground economy -- ECLAC says 43 percent of Latin America's economy is in the informal sector -- that by definition doesn't pay taxes.
But there are several pieces of data that deserve attention in this study. In a region with the world's highest levels of income disparities -- where one of the three richest men on earth, Mexico's telecommunications magnate Carlos Slim, coexists with one of the world's highest poverty rates -- the poor are paying an unusually high portion of taxes.
This is because most countries in the region collect so little in personal income and property taxes that governments resort to indirect taxes, such as value-added taxes on consumer goods. These taxes are paid by the entire population, but make a much bigger dent in poor people's incomes, one of the studies says.
Among the highlights of the ECLAC studies:
• While European countries collect an average 16.4 percent of their gross domestic product in personal income and property taxes, the United States collects 17 percent, Southeast Asian countries 7 percent, African countries 6.3 percent and Latin American countries 5.6 percent.
• While property taxes make up more than 4 percent of France's gross domestic product and 3 percent of the United States', they account for only 0.8 percent of Latin America's total economy. (Argentina and Brazil collect about 3 percent of their total economic output in property taxes, but Mexico, Peru and Ecuador collect only 0.3 percent and El Salvador, 0.1 percent.)
• While the world's 30 most industrialized countries collect more than 70 percent of their income and property taxes from individuals and 29 percent from corporations, in Latin America it's almost exactly the opposite.
Sixty-five percent of income taxes in Latin America are collected from corporations and only 35 percent from individuals.
''Many companies pass on these taxes to consumers,'' ECLAC economist Juan Pablo Jimenez told me in a telephone interview. ``As a result, direct taxes in Latin America are even less than what one might think.''
The ECLAC studies recommend, in addition to reducing tax evasion, collecting more income and property taxes from individuals rather than from corporations.
That would increase countries' tax collection and allow them to build more schools, hospitals, roads and ports, they say.
My opinion: I agree. But the region's top priority should be to increase the number of people who work within the formal economy and pay taxes.
Studies show that more than half of Latin Americans operate within the underground economy, mostly because stringent labor regulations keep companies from hiring workers.
According to World Bank data, Venezuela and Bolivia prohibit companies from laying off workers (something that not even communist China does), Argentina requires business owners to pay 139 weeks of salary to a fired employee and Ecuador 135 weeks of salary, even if companies can prove that the people they laid off were nonperforming workers.
By comparison, companies in the United States, Denmark and New Zealand can lay off a nonperforming employee without paying a penny.
As long as 43 percent of the region's economy and more than half of its working age population remain in the shadow economy, countries will not be able to raise their meager tax figures, and it won't be a big mystery why they are not more successful in raising their education, health and technology standards.