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The State of Tax in Latin America: Massive Evasion and Avoidance Block Human Rights and Development

Olivia Minatta is an Argentinian lawyer. Currently she is an LLM candidate at Columbia Law School and an intern in CESR’s Human Rights in Economic and Social Policy Program.
April 22, 2019
By Olivia Minatta and Sergio Chaparro
How are States spending their money in Latin America? Where do their resources come from?  Are the fiscal policies implemented effectively tackling inequality? Are spending cuts the only alternative towards a sustainable fiscal policy? 
These were some of the questions addressed in the Economic Commission for Latin America and the Caribbean (ECLAC) Seminar on Fiscal Policy that took place in Santiago, Chile at the end of March—questions that are relevant when assessing States’ compliance with their international human rights obligations.  The Seminar gathered together a group of public finance officers, multilateral institutions and economic experts to discuss the fiscal situation of countries in the region and to assess what reforms should be implemented to confront inequality. 
Taxation and fiscal policies are a vital tool for the realization of human rights: they provide States with the resources necessary to realize basic socioeconomic rights (such as education, housing or health) and at the same time, they are crucial for closing inequality gaps. States have the legal obligation to mobilize their maximum available resources to progressively advance rights and to find ways to reduce disparities between the wealthy and the most disadvantaged groups.
As some of the following statistics found in the ECLAC Fiscal Panorama 2019 show, one of the most relevant conclusions of the session was that States still have much to do to collect sufficient revenue to fund public services and finance sustainable development, as well as to reform unfair tax systems:
•Whereas OECD countries collect an average 8.2% of GDP through personal income tax (the most redistributive type of tax), the countries of the region raise only 1.6 % of GDP. This gap represents twice the public spending on health in the region.
•ECLAC estimates that tax exemptions (mostly to corporations, at least in the case of countries such as Chile, Costa Rica and Uruguay) result in a loss of approximately 3.7% of the GDP of the region. In the Dominican Republic and Uruguay, those exemptions amount for more than 6% of their GDP.
•Due to tax evasion and avoidance, Latin America lost approximately 6.3% of its GDP in 2017, amounting to US$335 billion. Some countries collect less than half of what they should in tax income. This figure exceeds the 5.2% of GDP estimated by ECLAC as necessary to overcome problems related to lack of infrastructure, access to housing and urbanization in the region. However, by 2016, only 0.7% of the regional GDP was invested in housing construction, community development, water utilities and public lighting.
•Tackling illicit financial flows could create revenues close to 1.5% of the regional GDP for 2016, approximately three times the amount Latin America usually invests in non-contributory pension systems (in a region where only 29.4% of the total population is covered by such pension schemes). 
All of these resources will also be essential to making meaningful progress towards the development goals that States committed to in the 2030 Agenda. The Forum of the Countries of Latin America and the Caribbean on Sustainable Development that convenes the week of April 22nd, 2019, represents a timely occasion for States to discuss specific measures to address these financing deficits. It will also be a good opportunity to build a joint position on how to face upcoming challenges, such as the future of corporate tax and the negative effects of the “race to the bottom” (lowering of corporate tax rates, granting of exemptions) countries are undergoing to attract foreign direct investment. According to IMF estimations, this practice results in losses of approximately 1.3% of the GDP in countries not belonging to the OECD. 
Ideological divisions together with important consensus and shared obligations
The Seminar on Fiscal Policy also showed continuing differences among Latin American governments on the role that States should play in the economy and the governance of fiscal policies. While some participants thought States should only operate as regulators of the private sector, others put more emphasis on the State as a central provider of goods and services. Regardless, it is important to emphasize that all States have the same obligations to make effective advancements in the realization of rights and the implementation of fiscal policies that are aligned with that end.
As the Inter-American Commission on Human Rights noted in its 2017 “Poverty and Human Rights” report, “poverty and extreme poverty cannot be addressed and eradicated without a broad framework of redistribution policies that reduce the region’s extreme socioeconomic inequality.” The Commission urged States to increase the low levels of revenue collection, review regressive tax systems and better distribute social expenditure.
In line with the IACHR report, the debate also showed there is a strong consensus among the countries of the region with respect to measures that should be taken immediately to broaden the fiscal space of states. Measures discussed during the Seminar include:
•Reassess fiscal benefits and other kinds of tax exemptions to corporations in order to evaluate whether they are inefficient, or whether they are given without considering all the trade-offs involved.
•Strengthen the fight against tax evasion and avoidance by reinforcing regional alliances and effective multilateral responses. 
•Implement helpful fiscal tools that simultaneously enhance sustainable development, such as “green taxes” that implement the “polluter-pays principle” and encourage companies to consider the harmful effects of their activity. Also, fiscal measures to disincentivize the consumption of sugar-sweetened drinks or property speculation were encouraged. 
•Strengthen the redistributive capacity of States through taxation, which means taking progressive income and wealth tax debates seriously.
•Protect social spending to confront economic fluctuations.
•Work towards better levels of transparency, participation and accountability as a way to improve the quality of spending.
These challenges are even more urgent considering the increase of extreme poverty that the region has been facing over the last few years. This demands immediate measures from States that are equipped to ensure the fundamental rights of the population, as well as to strengthen the systems of social protection, particularly in relation to the most vulnerable groups. The implementation of redistributive fiscal policies is essential to advance these changes. CESR and its allies will continue working towards that end, including through the Initiative for Human Rights Principles and Guidelines in Fiscal Policy in Latin America.  
Photo courtesy of Juan Pablo Jimenez, Twitter