Opinion Sur
Latin America is the region in the world that shows the greatest socio-economic inequality as a consequence of the way markets, which are badly regulated by the State, operate, and also the regressiveness of its weak fiscal structure (especially, its tax system). Through a structural approach, the author analyzes the circumstances that relate taxes with inequality, assuming the risks that outlining a limited scenario of such a heterogeneous subcontinent entails.1. Impact of the Tax System on Inequality
Taxes and public spending generally improve the level of (in)equality very little in Latin America. The great inequality imposed by the “market’s” functioning, despite state regulations geared at limiting it through macroeconomic, sector and labour policies, and other actions different from the fiscal themselves, is merely corrected by fiscal action, this is, by income collection and public spending distribution. Its effect tends to be marginal: for instance, in Argentina it manages to reduce the index that measures inequality, called Gini, from 0,51 (defined by the market) to 0,49 after tax collection (2006). That index reflects the level of inequality of a country between the extremes of absolute equality (Gini value 0) and utmost inequality (value 1): the closer to 1, the greater the inequality, the closer to zero, the greater equality.
A long term vision (and the situation at the beginning of the millennium)
Latin America and Southern Hemisphere Gini coefficients of income equity
(Argentina, Brazil, Chile and Uruguay) 1950-2002
(average per decade) [DOWNLOAD CHARTS->http://opinionsur.org.ar/Taxes%20and%20Inequality_charts.pdf]
In the most developed countries inequality “before state taxes and transfers” is merely lower than Latin America’s (with Ginis between 0.42 and 0.53 and Japan with an exceptional 0.34) but, unlike what occurs in Latin America, it diminishes considerably as a result of fiscal action (which accounts for the drop of inequality level to Ginis between 0.22 and 0.35).
2. Why do taxes contribute so limitedly to the correction of inequality?
Firstly, because the level of tax pressure at the regional level is extremely limited (save for Brazil), the taxation structure is very regressive and evasion/elusion levels are high. The tax system privileges excise taxes, and the tax burden on the income and property of the wealthiest is extremely weak.
Secondly, because the expenditure structure itself does not seem to exhibit a sufficiently progressive bias, due to: i) the weight of foreign debt servicing in the most heavily indebted countries; ii) transfers to private companies and subsidization provided to social sectors who do not need it; iii) shortages, inefficiencies and “leaks” in public investment: iv) limited scope and insufficient “progressiveness” in the supply of public goods (education, health and others); iv) very limited efficiency of the government administration apparatus (as well as of the Branches of Power, at the political level); and vi) inefficiency and “deviations” in the management of redistributional social programs. Hence, serious problems are being faced in these areas, on the part of income and public spending: if the present level and structure of public spending is not “legitimized” in vast sectors of society (particularly the so-called “middle sectors”), it will be difficult to successfully embark on significant changes aimed to increase tax pressure and reform the tax structure (in a progressive sense). Brazil, Chile and Uruguay are more advanced in these issues.
3– Implications for a process of fiscal reforms that are progressive and sustainable
On the one hand, with very few exceptions, a state structure that is degraded and inefficient has gained weight in the region, “colonized” by corporate interests of all kinds. Particularly, the state has been permeable to the power of an increasingly concentrated and trans-national private sector (the percentage of foreign property in key sectors of economic activity tends to be very high) and subject to strong struggles around hegemony at its heart periodically.
Several important countries in the region have witnessed, with variable impact during dictatorship “post-fall” and neo-liberal hegemony periods, several regressive redistributions of wealth, which have been very hard to reverse, mainly through: i) massive nationalization of private liabilities; ii) creation of huge public foreign debts; iii) extensive privatization processes transferring, at extremely low prices, a good portion of the public assets accumulated by preceding generations (including, in the case of Argentina, key sectors such as hydrocarbons an energy, and the granting, under extremely “lax” conditions, of concessions for mining and fishing operations); and iv) deterioration of public education. These regressive wealth redistributions have been prone to broadening and consolidating negative changes in the sphere of income (necessarily associated to the distribution of assets).
Thirdly, we should mention the, perhaps, most important problem: the consolidated cultural-institutional changes, which seem to have transformed societies with an egalitarian vocation into more fractured, passive and fearful societies (particularly in the face of the –real or manipulated–threats of economic instability). It may be verified, in this respect, that while social and economic sectors that have drawn gains from the above-described long-term evolution (the privileged ones) tend to work effectively to maintain at any cost the status quo, the huge majorities who might benefit from possible changes not only do not generally mobilize in an attempt to generate them but also, in many cases, even act in the opposite way that the most developed countries do (becoming the “drag-wagon” of minority sectors).
Finally, the trends of global economy and society put forth opportunities yet also important limitations for the development of progressive reformist processes in our countries.
4.- What can be done, then?
In the first place, social organizations of all sorts should begin to get informed and act in favor of change; of the continuity of the process of economic growth, with greater equality and more and better democracy in our countries. A national reformist alternative would also require, in addition to this necessary elucidation and discussion effort: i) that a broad political and social coalition demand and support the necessary changes; ii) strong determination, at the highest political spheres to begin and sustain, during the long periods required, these substantial changes in relation to the distribution of income as well as –to the largest possible extent– wealth; and iii) a certain willingness to reach agreements intended to avoid disruptions by privileged sectors (who are used to “not paying” taxes in Latin America). At the regional scale, it would be very important to secure the consolidation of the integration process and the support, “contagion” and cooperation effects that might be conducive to leveraging the national change processes and the possible regional synergies.
Some key issues in the reformist agenda further call for, inevitably, the adoption of actions at the supranational level: for instance, among others, the case of the still pending global financial regulation; the creation of a global tax authority; the elimination (or substantial limitation of the room for maneuver) of tax havens; and the effective and urgent implementation of the necessary actions in the environmental field. To boost this regional agenda, progress at the regional front is also indispensable.
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*Argentine economist, member of the Fénix Group and researcher in the Economics and Finance Center for the Development of Argentina (CEFID-AR)
