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IDB: Reform tax system, reduce income inequality

Monday, May 20, 2013

WASHINGTON DC—A new study published here is urging Latin America and Caribbean governments to renew efforts to modernise their tax system. The study done by the Inter-American Development Bank (IDB) suggests that while Latin America and the Caribbean have made great strides in boosting tax collection in recent years, they need a new generation of fiscal and tax reform to reduce income inequality, cut evasion, boost productivity, strengthen local governments and preserve the region’s natural resources.


The study published here under the title More than Revenue: Taxation as a Development Tool was launched at the Woodrow Wilson International Centre for Scholars in Washington, DC. Every year, the IDB conducts an in-depth comparative study of an issue of concern to Latin America and the Caribbean. This year’s edition presents taxation in the region as a missed opportunity.


The study argues that taxation is largely viewed in the region as a means of generating income to pay governments’ bills, rather than as a valuable instrument to achieve important development goals. “Taxation is one of the unfinished areas of reform left for the region to tackle,” says Ana Corbacho, IDB Sector Economic Advisor and co-editor of the book. “Smart tax policies will help us fight poverty and inequality, diminish the effects of climate change, and improve private sector productivity.”


The book outlines advances made in the region’s tax systems in recent years and proposes tax reforms to advance equitable development. Countries in the region have strengthened their tax administrations, boosting collection by 2.7 per cent of gross domestic product (GDP) over the past two decades, the fastest rate in the world. However, the region still takes in just 17 per cent of GDP in tax revenue, less than it should, given its per capita incomes.


IDB Vice President for Sectors and Knowledge, Santiago Levy, said existing tax policies stymie the growth of micro, small and medium enterprises (SMEs), contributing to the low productivity that plagues the region. The IDB said that taxes that help protect the environment are another largely untapped source of revenue in the region. In Europe, such taxes collect an average of 2.5 per cent of GDP, but in Latin America barely one per cent.





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