Inter-American Development Bank: Latin American Tax Reform Needed

A new study from the Inter-American Development Bank (IDB) charges that tax systems in Latin American countries give too many tax breaks to the rich and do too little to punish evasions, and says that these problems keep the region's governments from raising sufficient revenue to combat poverty, boost development, and improve environmental quality. The organization also argues that policymakers in the region see taxation as too limited of a tool - instead of simply a source of revenue, it says, taxes should be used as a tool of development.

The IDB is the region's biggest multilateral source of financing, providing loans at standard commercial interest rates to national, provincial, state and municipal governments, autonomous public institutions, civil society organizations and private sector companies. Each member country appoints a governor whose voting power is determined by the percentage of its country's stake in the Bank's capital. The 26 Latin American and Caribbean countries in the IDB hold 50.02 percent of the voting power. The United States is the single largest shareholder, with 30.01 percent.

The IDB's book "More than Revenue: Taxation as a Development Tool", released on Wednesday, is part of its Development in the Americas flagship series which presents an annual study of an issue of concern in Latin America and the Caribbean. The book calls the personal income tax regime an "empty shell" and says its weakness has "squandered the opportunity to attack the region's serious income inequality", according to a summary issued by the IDB.

"Half the potential collection of individual and corporate income tax is lost through evasion," the organization writes. "The main reason is that the probability of being punished for tax evasion is virtually nil."

Personal income taxes in Latin America account for an average 1.4 percent of gross domestic product, as compared to 8.4 percent in economically developed countries in other parts of the world. Overall taxes contributed 23.4 percent of Latin America's GDP compared to 34.8 percent in developed countries elsewhere.

Only one in 10 Latin Americans are registered taxpayers, compared with six in 10 elsewhere in developed countries. Less than 3 percent of those taxpayers are subject to general audits each year, according to Reuters.

The study found that the richest 10 percent of taxpayers in Latin America contribute 80 percent of total revenue, but they also pay an average effective tax rate of just 3.8 percent, as countries in the region often shelter investment income and provide tax breaks amounting to 50 percent of personal tax receipts.

Latin America is home to 99 billionaires including Carlos Slim, a Mexican telecommunications magnate who Forbes says is the richest man in the world.