RECOVERING GROWTH: REBUILDING DYNAMIC POST-COVID-19 ECONOMIES AMID FISCAL CONSTRAINTS
Percent
Income Taxes: The VAT, by focusing on consumption, Figure 2.4: Higher Income Taxes May Have tends to be regressive. Individual (or personal) in- Negative Growth Consequences come taxes, however, can be designed to be progres12 sive and thereby help offset high levels of inequality. 10 Income tax rates are generally low in LAC, but in8 creasing them may have more direct adverse effects 6 on labor supply, effort or new business activity. Ev4 idence of the elasticity to taxable income (ETI), de2 fined as the percentage change in pretax individual 0 income, which in the aggregate is highly correlated with GDP, to a percentage change in the individual -2 income tax, is virtually non-existent in the devel-4 oping world, including the LAC region. Short-term -6 ETI estimates for the United States range between -8 -0.02 (Saez 2004) to -1.2 (Mertens and Olea 2018), -10 however, recent work at the World Bank by Ventu-12 ri, Riera-Crichton, and Vuletin (2021) finds that for -14 a sample of 6 Latin American countries (Argentina, 0 1 2 3 4 Brazil, Colombia, Ecuador, Paraguay, and Peru) the Year response may be significantly more negative. Figure Source: Venturi, Riera-Crichton, Vuletin (2021). 2.4 shows a short-term ETI of about -2.5 suggesting Note: The Marginal Income Tax Multiplier represents estimated percent change in National Income that the distortive labor and macroeconomic costs of increasing individual income taxes are, at least, about 2 times larger than those estimated in the United States, suggesting that income taxes are potentially costly in terms of growth in LAC. Property Taxes: The growth impacts of property taxes are expected to be less adverse since the assets are not mobile and the link to growth is less clear, and they can also be designed to be more progressive. There is room to expand them over the medium term in LAC: OECD levels of property taxes constitute 2 percent of GDP (5 percent of taxation) while virtually all countries in LAC are below 0.6 percent and in no LAC country do they exceed 0.8 percent (Birdsall and Gupta 2018, Figure 2.5). Pro-health Taxes: Though the case for taxing tobacco, alcohol and sugar-sweetened beverages is generally grounded in their effects on health, increasing the excise taxes has been estimated to raise the tax to GDP ratios by an average of 0.7 percent in lower-income countries (LICs) and lower-middle-income countries (LMICs) (World Bank 2019). Spain, for instance, increased the value-added tax on sugar-sweetened beverages from 10 to 21 percent in 2021. When longer-term health gains are factored in, pro-health taxes can be expected to deliver most of their benefits to lower-income populations and their net effect is progressive (Fuchs, Icaza and Paz 2019). Carbon Taxes: Conceived of raising the price of emitting CO2 to reflect the social costs, carbon taxes clearly also count as a source of revenue. Nevertheless, to date, there are few examples in LAC of experiments with carbon taxes. The section below on eliminating energy subsidies makes clear that the revenues involved are very significant. Tax Compliance: As a final point, raising tax collection efficiency would dramatically increase revenues. As an example, the average rate of evasion of VAT in LAC is 29.4 percent, and of corporate income taxes is 49.2 percent (CEPAL 2000). Both the use of new technologies as well as measures to boost tax morale could reduce evasion substantially.
CHAPTER 2 | Rebuilding a Dynamic, Inclusive and Greener Economy in a Constrained Fiscal Environment
33
