Taxation in Latin America From words and data to policy action. Angel Melguizo OECD Development Centre

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Taxation in Latin America

From words and data to policy action

Angel Melguizo

OECD Development Centre

Wilson Center – Latin American Programme Washington DC, April 20 2017

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Open data for better policies

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Revenue Statistics and Taxing Wages in LAC

• Detailed, internationally comparable data on tax revenues and labour tax laws (including a simulator by income and family

composition) in 20+ Latin American and Caribbean (LAC) economies

• Based on OECD Revenue Statistics and OECD Taxing Wages methodologies, but adapted to Latin America

• Joint projects with the Economic Commission for Latin America and the Caribbean (ECLAC) , the Inter-American Centre for Tax

Administrations (CIAT), and Inter-American Development Bank (IDB)

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LAC countries continued their convergence

process towards OECD taxation levels, despite the economic slowdown

Total tax revenues in LAC and OECD, 1990-2015

(Percentage of GDP)

0 5 10 15 20 25 30 35

1990 91 92 93 94 1995 96 97 98 99 2000 01 02 03 04 2005 06 07 08 09 2010 11 12 13 14 2015

Difference B-A LAC (24) (A) OECD (35) (B)

Source: OECD/ECLAC/CIAT/IDB (2017), Revenue Statistics in Latin America and the Caribbean

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Wide national variations exist across LAC countries (‘Americas Latinas’)

Total tax revenues in LAC countries and OECD, 2015

(Percentage of GDP)

0 5 10 15 20 25 30 35 40

OECD LAC Guatemala Dominican Republic Panama Peru El Salvador Mexico Paraguay The Bahamas Chile Colombia Nicaragua Venezuela Ecuador Honduras Costa Rica Bolivia Jamaica Belize Uruguay Trinidad and Tobago Barbados Brazil Argentina Cuba

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Tax structures continue to be based on indirect tax receipts (VAT and other taxes on consumption)

Tax revenue composition in LAC and OECD, 2015

(Percentage of GPD and total tax revenues)

1. Represents a group of 24 Latin American and Caribbean countries . Chile and Mexico are also part of the OECD (35) group.

2. Represents the unweighted average for OECD member countries in the year 2014.

Source: OECD/ECLAC/CIAT/IDB (2017), Revenue Statistics in Latin America and the Caribbean 6.2 p.p.

(27%)

3.8 p.p.

(16%)

0.8 p.p.

(4%) 11.2 p.p.

(49%)

0.9 p.p, (4%)

Taxes on income and profits Social security contributions Property Taxes on goods and services Other taxes

11.5 p.p.

(34%)

9.1 p.p.

(27%) 1.9 p.p.

(5%) 11.0 p.p.

(32%)

0.7 p.p.

(2%)

LAC (24)¹ OECD (35)²

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Despite recent increases, personal income tax collection continues to be low (vs CIT)

Personal and Corporate income tax revenues in LAC and OECD, 2015

(Percentage of GDP)

Note: the share on taxes on income and the share on taxes on profits may not add up to the total share on taxes on incomes and profits due to unallocable revenue. Only countries that could allocate 75% or more of revenue of taxes on incomes and profits into the sub categories taxes on income and taxes on profits are shown in the figure above.

0 3 6 9 12 15

LAC OECD The Bahamas Bolivia Paraguay Guatemala Dominican Republic Colombia Costa Rica Chile Panama Peru Honduras Belize Cuba Brazil El Salvador Uruguay Argentina Mexico Jamaica Trinidad and Tobago Barbados

PIT CIT

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Fiscal revenues from non-renewable natural

resources are (too?) important sources of revenue

Fiscal revenues from non-renewable natural resources, 2015

(in billions of dollars and percentage of GDP)

0 10 20 30 40 50 60 70

Jamaica Suriname Dominican Republic Trinidad and Tobago Peru Chile Bolivia Ecuador Colombia Argentina Venezuela

Brazil Mexico 6.1

As % of GDP

1.4 6.7 1.7 2.7 6.3 10.9

1.3 1.3 7.7 0.3 0.9 0.2

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From data to policy action (I)

• Given the economic slowdown and weak commodity prices, a no- policy change scenario suggests that tax revenues will not increase. Key to ensure the financing of education, infrastructure and social programmes.

• Tax reforms have to come, hand in hand, with improvements in their management. Latin American governments need to strive for more efficient, transparent and innovative services

• In focus – tax reform and labour markets

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Source: IDB (2015), Sistema de Indicadores de Mercado Laboral y Seguridad Social (SIMS)

Informality is pervasive, also within the emerging middle class. Could tax reform help?

Labour informality in Latin America

(Percentage of workers contributing to pensions, 2013)

85%

64%

42%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

GTM HND PER PRY NIC BOL COL ECU SLV MEX PAN DOM ARG VEN BRA URY CRI CHL

Quintil 1 Promedio Q2 - Q4 Quintil 5 Promedio ALC Q1 Promedio ALC Q2-Q4 Promedio ALC Q5

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Labour costs in LAC are generally lower than in OECD (wages & taxes)

Labour costs in Latin America and OECD

(Average wage earner; social contributions and personal income tax; 2013)

0 5000 10000 15000 20000 25000 30000 35000 40000 45000 50000

Jamaica Nicaragua Peru Honduras El Salvador Trinidad and Tobago Dominican Republic Guatemala Bolivia Mexico Venezuela Colombia Ecuador Uruguay Paraguay Panama Brazil Costa Rica Chile Argentina LAC OECD

Net wages Tax wedge

Source: OECD/CIAT/IDB (2016), Taxing Wages in Latin America and the Caribbean

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Labour costs are relatively low due to low taxes on wages (22% vs 36%)…

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… explained by the personal income tax (average formal worker is exempted)

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Personal income tax only taxes the top deciles…

Single worker, no children Married couple, two children

Tax wedge by level of income in Latin America

(Percentage of labour costs, 2013)

-5 0 5 10 15 20 25 30

1 2 3 4 5 6 7 8 9 10

Deciles de ingreso Transferencias monetarias Impuesto a la renta CSS empleado CSS empleador

-10 -5 0 5 10 15 20 25 30

1 2 3 4 5 6 7 8 9 10

Deciles de ingreso Transferencias monetarias Impuesto a la renta CSS empleado CSS empleador

Source: OECD/CIAT/IDB (2016), Taxing Wages in Latin America and the Caribbean

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… and even up there, average tax rates are modest

Average personal income tax rate on the top decile in Latin America (Percentage of wage, 10th decile, 2013)

0 2 4 6 8 10 12 14 16 18 20

ALC Paraguay Colombia Venezuela Guatemala Chile Ecuador Bolivia Costa Rica Honduras Argentina Peru Nicaragua Rep. Dominicana Panama Uruguay Brasil El Salvador Trinidad and Tobago Jamaica Mexico

Soltero sin hijos Pareja casada con dos hijos

Source:

OECD/CIAT/IDB (2016), Taxing Wages in Latin America and the Caribbean

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0% 5% 10% 15% 20% 25% 30%

OECD LAC Chile Honduras Trinidad y Tobago Peru Guatemala Ecuador Jamaica Bolivia Venezuela El Salvador Panamá Paraguay Dominican Rep Nicaragua Uruguay Mexico Costa Rica Argentina Colombia Brazil

Employer contributions are alike in LAC and OECD

Employer social contributions in Latin America and OECD

(Average wage earner; % labour costs; 2013)

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What about those who are informal? Calculating (tax) costs of formalisation

0%

20%

40%

60%

80%

100%

0%

20%

40%

60%

80%

100%

D1 D2 D3 D4 D5 D6 D7 D8 D9 D10

Tasa de informalidad Costo teórico de formalización

Informality and theoretical tax costs of formalisation in LAC

(Average LAC wage earner by income decile; % wages; 2013)

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Americas Latinas (once again)…

Source: OECD/CIAT/IDB (2016), Taxing Wages in Latin America and the Caribbean and IDB (2015), Sistema de Indicadores de Mercado Laboral y Seguridad Social (SIMS)

0%

20%

40%

60%

80%

100%

0%

20%

40%

60%

80%

100%

D1 D2 D3 D4 D5 D6 D7 D8 D9 D10

Chile

0%

20%

40%

60%

80%

100%

0%

20%

40%

60%

80%

100%

D1 D2 D3 D4 D5 D6 D7 D8 D9 D10

Centroamérica

0%

20%

40%

60%

80%

100%

0%

20%

40%

60%

80%

100%

D1 D2 D3 D4 D5 D6 D7 D8 D9 D10

Colombia

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… but tax and informality are correlated for low and middle-income workers

Costos de teóricos de formalización (como porcentaje del ingreso del individuo)

Informality and theoretical formalisation costs for middle-income workers in Latin America

URY CHL BRACRI

VEN PAN

DOM ARG

ECUBOLGTMPERHNDSLVMEXCOLPRYNIC

0%

20%

40%

60%

80%

100%

0% 10% 20% 30% 40% 50%

B. Ingresos promedio de los deciles 3 - 5

Source: OECD/CIAT/IDB (2016), Taxing Wages in Latin America and the Caribbean and IDB (2015), Sistema de Indicadores de Mercado Laboral y Seguridad Social (SIMS)

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From data to policy action (and II)

• Boosting good jobs (protected & productive) should be a central element of the policy (also fiscal) agenda

• Personal income tax can be strengthen (revising minimum exempted) and made more progressive (tax deductions, rates?)

• Revision of non-wage labour costs – notably for low- and low-middle income workers should be evaluated. Progressive subsidies on social contributions?

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Taxation in Latin America From words and data to policy action. Angel Melguizo OECD Development Centre

Taxation in Latin America

From words and data to policy action

From data and words to policy action