Latin America’s taxing problem
The world’s most unequal region, Latin America has long been generous to the wealthy. Some 100 billionaires and more than 14,000 ultra-high-net-worth individuals, each with a fortune of at least $30m, have benefited from low tax rates, patchy collection efforts and, in some cases, lax controls on tax evasion. Wealth taxes have mostly remained taboo.
Until now, that is. The coronavirus crisis has transformed the region’s political weather, forcing taxes on personal fortunes on to the agenda in at least eight Latin American countries and creating a greater consensus that the time may have come for privileged elites to shoulder more of the financial burden of supporting their fellow citizens.
In Brazil, the region’s largest economy, the 1988 constitution foresaw a wealth tax. But for more than three decades, debates went nowhere. The country’s rich, meanwhile, exploded in number: Forbes listed 58 Brazilian billionaires last year, headed by banker Joseph Safra with an estimated $19.9bn fortune.
“Almost all our presidents have promised a tax on wealth during their campaigns,” says Lucas Galvão de Britto, a lawyer specialising in tax reform. “There have been at least 16 legislative projects over the years, but none of them ever progressed, for lack of political support.”
Now, four different proposals for a wealth tax are jostling for attention in parliament, and some members believe its time has come. “Inequality in Brazil is not new. It is 500 years old,” says Enio Verri, leader of the opposition Workers’ Party (PT) in the lower house. “A wealth tax is something congress would normally never agree to taking forward, but the coronavirus crisis is imposing agendas which would never normally be discussed.”
The backdrop to the charged debates over taxation is stark. Covid-19 has struck Latin America with particular force. Death rates have soared in Brazil, Mexico, Peru and Ecuador. By late May, Brazil had the world’s second-highest number of coronavirus cases after the US. Meanwhile, Peru had reported more infections than China, according to data from Johns Hopkins University in the US.
Recession has hit the continent’s commodity-dependent economies much harder than those of Africa or Asia. In Brazil alone the IMF is forecasting a 5.3 per cent drop in gross domestic product this year, and Wall Street analysts expect the decline to be even worse: up to 7.7 per cent.
Latin America was struggling to grow even before coronavirus took hold. Countries relied heavily on foreign capital, which was pulled out as the pandemic developed. Remittances, tourism and oil — all foreign exchange earners — were hit hard. Underfunded state healthcare systems are struggling across the developing world, but the challenges are particularly acute in Latin America because of the rapid spread of coronavirus in urban centres. In addition, the presidents of Brazil and Mexico, the two most populous countries, sent confusing messages, playing down the crisis and questioning medical judgments.
Weak public finances preclude the spending boosts or borrowing binges seen in Europe or North America. Many Latin American nations already had very high debt levels before the pandemic and have little fiscal wriggle room. Argentina, with public debt of nearly 90 per cent of GDP, defaulted on its sovereign debt last month for the ninth time in its history. The pandemic has thrown a spotlight on Latin America’s extreme inequalities — the UN Economic Commission for Latin America and the Caribbean (Cepal) says it is the world’s most unequal continent. Brazil has the biggest income inequality of all, with a Gini coefficient — a key measure of inequality — of 53.9 in 2018, higher than most countries in sub-Saharan Africa, according to the World Bank.
A wave of violent protests against poor public services and high living costs hit Chile in October last year and also shook Ecuador, Colombia and Panama. Social tensions were strained further by reports that coronavirus was spread to Latin America early on by businesspeople and wealthy tourists returning from Europe, North America and Asia, who in some cases infected their domestic staff.
The disease is hitting the poor particularly hard, as many live in shanty towns, where social distancing is almost impossible, and must go out to work daily if they are to feed their families. Politicians on the left are arguing, therefore, that some funds for healthcare and economic rescues should come from higher taxes on the rich and tougher enforcement to cut chronic tax evasion. Enforcement has traditionally been patchy, with many wealthy people holding money abroad to escape the attention of underfunded and weak national authorities.
The idea of resorting to taxes on assets as well as income has obvious appeal for Latin American leftists, such as Argentina’s recently elected Peronist president Alberto Fernández, even though many economists argue that the continent would raise much more money by collecting existing levies properly, raising tax rates on income and land, and clamping down on evasion.
“In most [Latin American] countries, reforms should focus on raising tax collection to finance development,” wrote economist Ángel Melguizo in a World Economic Forum blog post when he was head of the Latin America unit at the OECD, the economic grouping.
Mexico, for example, has one of the OECD’s lowest tax takes. Just 16.1 per cent of GDP is levied in taxation, well below the Latin American average of 23.1 per cent and less than half the OECD average of 34.3 per cent. In Argentina, one of the few Latin American states with a wealth tax, Carlos Heller, a parliamentarian from the leftist Peronist administration, is helping to draft plans for a new one-off tax on assets. “We have a fatal combination: a colossal increase in spending and a colossal fall in tax revenues,” says Heller, who heads the budget commission in the lower house of congress. “So we have decided it is reasonable to try to get a contribution from those people who have an accumulation of riches.”
The new levy would hit Argentines who had declared net assets of more than $3m at the end of 2019. Heller estimates it will raise $4bn from the roughly 12,000 people who would be affected. But the existing wealth tax raised just 14.5bn Argentine pesos (then $381m) in 2018.
While the plan seems popular with the public, conservative voices in the opposition alliance led by Fernández’s predecessor, multimillionaire businessman Mauricio Macri, are not so happy. Luis Juez, a deputy from Macri’s Cambiemos bloc, has described the wealth surcharge proposal as “secondary hippyism”.
The business community, which already had to contend with many boom-and-bust cycles, is alarmed. “You cannot say that taxing the wealthy is incorrect, especially in a pandemic,” says one local multimillionaire, who asked to remain anonymous. “It’s how you do it that is important. Some people have invested in Latin America despite its volatility, high inflation and difficult conditions. A tax like this will disincentivise them.”
Pro-business economists fear that a wealth surcharge will only worsen Argentina’s chronic capital flight, with an estimated $300bn-plus already held abroad.
The riots over inequality in Chile last October had already triggered a debate on raising taxes and increasing government spending even before the pandemic began. Wealth is highly concentrated: 206 family offices in Chile have assets under management of $52bn, a handful of traditional clans dominate business, and the conservative president Sebastián Piñera is himself a billionaire.
Piñera suffered political embarrassment during the riots: he was photographed dining with his family in a smart Italian restaurant; in a leaked WhatsApp recording, his wife Cecilia Morel was heard comparing the violence to an “invasion of aliens”.
Camila Vallejo, a communist deputy in Chile’s congress, has proposed a 2 per cent wealth tax for the richest 1 per cent of Chileans. Despite support from other leftwing parties, her plan in its current form is unlikely to succeed in the face of opposition from Piñera’s centre-right government.
“There has been some discussion on a wealth tax but quite a lot of scepticism too,” says Rodrigo Vergara, a former president of the central bank. “The big discussion at the moment is about more spending and extra taxes would go against the reactivation of the economy. Once the pandemic is over, the tax discussion will restart.” He makes a point echoed by other economists: the case for wealth taxes in Latin America is undermined by the fact that they have been dropped in some European countries that previously imposed them, such as France. “If advanced EU states cannot make these levies work, who can?” is a widely asked question.
Andrés Velasco, a former Chilean finance minister who is dean of the school of public policy at the London School of Economics, says it is “true that in many Latin American countries the rich have ways of escaping taxation”. But he adds that wealth levies are difficult to administer. “If you look around Latin America, there is very little property taxation. And if the state cannot tax you on the value of your home, how likely is it that it can tax you on the paintings inside the house?”
Many economists believe that rather than pursuing wealth levies, Latin American governments should plug holes in the existing tax net. According to Cepal estimates, tax evasion in the region in 2017 amounted to 6.3 per cent of GDP — equivalent to $335bn — which is more than enough for the fight against Covid-19. With asset taxes already used in Colombia and debates on introducing wealth taxes under way in Peru, Bolivia, Ecuador, Paraguay and Guatemala, one country stands out as the glaring exception to the Latin American drift towards wealth taxes — Mexico. Viridiana Rios, a Mexico City-based political analyst and global fellow at the Wilson Center, a US think-tank, says discussion has been stifled by the leftist president Andrés Manuel López Obrador’s determination to abide by election pledges not to raise taxes. “In Mexico, it has historically been very hard to charge taxes on the elites,” she says. “The political elites came to power under the umbrella of the economic elites and as a result have not been able to charge them enough tax.”
Still, wealth tax campaigners are not giving up and some see a model in Uruguay, one of the three countries that already has asset taxes, along with Colombia and Argentina. A small country with an enviable economic record, it levies an annual tax of up to 1.2 per cent on assets held in the country. It is a prosperous nation and home to more than 800 ultra-high-net-worth individuals — roughly 10 times more in relation to its population (3.4m) than the Latin American average. But the tax is more symbolic than real.
Gustavo Viñales, professor of taxation at the Universidad de la República in Montevideo, says it raises only a “tiny amount, about 0.04 per cent of GDP”. Assets held overseas do not need to be declared, property taxes are based on low historical values and there is no inheritance tax. “In other words, there are no taxes on the rich,” says Viñales. The lesson from Uruguay seems to be that when other taxes are levied effectively and spent wisely, the state can deliver results. Wealth taxes are no answer to general economic and fiscal inefficiency.