Versión Español
By Yamila Feccia
EspañolTax burden plays a significant role in the development of a country. This year, as a result of the stir caused by Panama Papers, tax shelters (or badly named tax havens) were challenged, along with the practice of evasion and tax avoidance.
But amid the turmoil, what we forgot to consider is the fiscal voracity that is escalating in Latin America. A case in point is Argentina, which has the highest tax rates in the world — in addition to suffering from shyness to close the fiscal gap inherited from the previous government.
In this context, in the absence of a plan to reduce regulations and with the presence of a “tax cartel,” what role does the market play?
Admittedly, taxes above a certain level become immoral and inefficient. These taxes often create distortions in the decision-making process and affect productivity at the corporate level. But they also have an impact on competitiveness and even trigger the loss of investment opportunities, not only local but also foreign. The most interesting aspect, however, is that tax theft makes arbitrary spending possible and leads States to believe that they are meeting the “real” needs of people more efficiently than if they did it by themselves. In other words, the taxpayers hand over their money so that the administrative state can make decisions for themselves, while distorting the incentives that the market generates.
When the government’s fiscal voracity becomes unsustainable, businesses and citizens look for a way out and seek refuge under more favorable and convenient conditions where their money can stay safe. Tax shelters are not dens for criminals, as the popular myth would have us believe. Having money abroad is absolutely legal, as long as it comes from lawful activities. Reality shows that nobody is willing to offer their income to a gluttonous state, so that it can increase its revenues through taxes. It has become clear that tax shelters are not a matter of preference, but of necessity.
On the other hand, tax shelters do not harm the most vulnerable people as it is commonly believed. What really hurts the poorest countries are the countless regulations and taxes that weigh down on them. In other words, shelters are a benefit to anyone who enjoys an environment of fair competition. According to Oxfam Intermón, business investment in tax shelters has quadrupled between 2000 and 2014. Currently, the hidden money reaches US$ 7.6 trillion and exceeds the GDP of the United Kingdom and Germany together. Also, 9 out of 10 multinational companies have accounts in tax shelters. If that money was poured into the economy, there would be more companies, more work and less poverty. There would be no more excuses for a giant administrator and auditor state.
According to the report “Fiscal Panorama of Latin America and the Caribbean” by ECLAC, last year the tax burden in Latin America increased by 0.2 percentage points of GDP. The agent behind “progress” -as ECLAC calls it in the report – is an increase in revenues coming from income taxes. In 2015, public revenue from income tax grew significantly in Argentina (12.8 percent), Chile (15.6 percent), Costa Rica (13.6 percent), Ecuador (11.7 percent) and Mexico (24.0 percent). Instead, there were notable reductions carried out in Brazil (-6.1 percent), Guatemala (-6.4 percent) and Peru (-16.5 percent). However, as stated in the report, the level of tax burden is higher in Argentina, Bolivia and Brazil when compared to countries with a similar GDP.
The World Economic Forum for the Annual Meeting in Davos has published an article that mentions that Latin America has the highest levels of inequality in the world. One of the reasons is the tax system, which has been criticized and labeled as archaic and dysfunctional. Furthermore, they argue that in order to achieve the sustained “development” it will be necessary to adjust and modernize the tax system.
Argentina: the highest total tax rate in the world
Meanwhile Argentina has gone the extra mile to stand out from the crowd. According to the latest Global Competitiveness Report of the World Economic Forum, Argentina is the country with the highest total tax rate in the world (**). Along with Italy, it is currently one of the countries where taxes discourages investments the most. In addition, Argentina is the fourth country with the highest corporate tax rates in the world. According to a report published by the Tax Foundation in August 2016, the rate reaches 35 percent. At the top of the list we find the Arab Emirates (55 percent), Puerto Rico (39 percent) and the USA (38.9 percent). Meanwhile, South America (27 percent) is well above the world average. This useful information should be taken into account by the current Minister of Economy when looking for investors to boost economic growth.
As stated in a report published by Instituto Argentino de Análisis Fiscal, the Argentine Institute for Fiscal Analysis, the formal comprehensive tax burden (*) during 2016 would be around 47.5 percent and 57.9 percent of total household income. In other words, Argentineans in the formal sector work the first seven months (211 days) of the year for the state, and get to keep the salary of the remaining five months for themselves. In 2012, a formal salaried worker had to work only five months (171 days) to pay for all the taxes charged by the different levels of government. The current effective tax burden -what the State actually raises- has grown significantly in the last 15 years. Since 2000 tax collection at the three levels of government expressed as a percentage of GDP was 21.4 percent (similar to the ’90s). Currently, that percentage reaches 35%, which means that the tax burden has grown 60 percent over the last 15 years.
For the time being, Argentina is nothing more than a tax hell and has reached a position in the worst rankings in the world. It is important that its representatives be able to understand that public finances will improve if there is more economic activity and not more taxes. However, current President Mauricio Macri has promised to discuss the tax reform in the 2017 Budget and a proposal for a new fiscal target to drop the GDP fiscal deficit by a point and half.
In conclusion, according to Daniel J. Mitchell — an economist from Cato Institute — tax havens are the only disincentive to unlimited tax increases; i.e., they have an important role in the liberalization process as they work as a kind of tax competitor. Therefore, if tax havens did not exist, the states would have complete power over taxes and it would be impossible to escape the submission of income and the voracity of governments.
It is clear that not all government spending hinders economic development. It makes sense and enhances growth when it comes to the protection of property rights and the enforcement of the rule of law. The problem arises in countries with strong welfare states, because in order to sustain it and make it possible — in most cases — it is necessary to have high tax systems that slow down the engines of economic growth.
With that said, it is necessary to stop seeing offshore investments as evil. Tax evasion must be fought with lower rates and tax reforms, not by wiping out tax havens. While governments do not want to face their fiscal bombs, the market will give a better answer by offering more favorable terms, and the biggest losers will remain the poorest.
(*) It includes employer social security contributions as well as direct and indirect taxes charged by government at federal, provincial and municipal level.
(**) It includes income tax and payroll taxes, among others.
Yamila Feccia is an Argentinean economist from Rosario who specializes in the analysis and development of economic variables. She is a researcher with the Center for Social and Economic Research at Fundación Libertad in Argentina.
