Improving tax policy in Latin America and the Caribbean: A balancing act

• Published in: Policy File 2022
• Main Authors: Larrain, Felipe B, Zhang, Pepe
• Format: Report
• Language: English
• Subjects: Atlantic Council; Taxation

Latin America and the Caribbean is in the midst of a delicate economic transition, with five of the LAC6 countries attempting a tax reform before their GDPs recovered to pre-pandemic levels. As the region confronts rising inflation, the economic spillovers of the war in Ukraine, and budgetary pressures left behind by the pandemic, governments should improve their taxation systems to rebuild fiscal stability, stimulate growth, and enhance equity delicate balancing act among overlapping policy priorities. Regional taxes are a heavy administrative burden, requiring nearly twice the time to complete in LAC as in the OECD. At the same time, the region struggles with average tax evasion of 5.6 percent of GDP and a continued overreliance on corporate income taxes. With still-high public debts and fiscal deficits, governments must respond by implementing policies to streamline and modernize revenue collection and management. What are the pros and cons and trade-offs involved in increasing or decreasing the region's three main taxes (VAT, PIT, and CIT)? How can governments optimize enforcement and collection without resorting to rate changes? What policies outside the tax authority are needed to support tax reforms? How can policymakers better navigate the thorny politics of tax reforms? The following pages provide new analysis and concrete recommendations to address these questions. Drawing on the powerful expertise of its authors in addition to valuable commentary and insight from private, nonpartisan strategy sessions, legal experts, and regional governments, this report is a strong addition to the Adrienne Arsht Latin America Center's #ProactiveLAC Series, which aims to provide insight and foresight to LAC countries on how to advance economic reactivation and long-term prosperity.