How Tax Policies Promote Unsustainable Economic Growth and Exacerbate Inequality in Latin America
How Tax Policies Promote Unsustainable
Economic Growth and Exacerbate
Inequality in Latin America
Ramón López
University of Maryland and University of Chile
August 14, 2012
How Tax Policies Promote Unsustainable Economic Growth and Exacerbate Inequality in Latin America
Presentation
This presentation is based on the following papers:
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Ramon E. López and Eugenio Figueroa B. Fiscal policy in
resource rich and highly unequal economies: Hindering
sustainable development. Departamento de Economı́a,
Universidad de Chile, Discussion Paper vol. 346, pp. 1-49,
November 2011.
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Ramon E. López and Dana Andersen. Green Growth and
Economic Development in Latin America. Working paper,
2012.
How Tax Policies Promote Unsustainable Economic Growth and Exacerbate Inequality in Latin America
In evaluating tax policies market failures should play a central role
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Capital market failures causing liquidity constraints that
restrict households’ investment in human capital.
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Environmental market failures that makes growth excessively
degrading of the environment.
How Tax Policies Promote Unsustainable Economic Growth and Exacerbate Inequality in Latin America
Predetermined historical conditions
1.- High concentration of wealth and income
Figure: Regional Inequality: The ratio of the share of income of the top
10 percent to the income of the bottom 10 percent.
How Tax Policies Promote Unsustainable Economic Growth and Exacerbate Inequality in Latin America
Predetermined historical conditions
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2.- High dependence of the economy on natural capital
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3.- Capital market and environmental market failures
4.- Large economic rents
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Natural resource rents due to the appropriation of natural
resources by a small elite
Monopoly rents especially in the retail sectors including
groceries, financial sectors, health care sectors and so forth
(Table 2)
Inside information and several others
How Tax Policies Promote Unsustainable Economic Growth and Exacerbate Inequality in Latin America
Monopoly Rents
Figure: Chile: Average annual economic rents generated by natural
resources in selected industries; 2007-2010
How Tax Policies Promote Unsustainable Economic Growth and Exacerbate Inequality in Latin America
Tax Policies
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1. Low tax revenues
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2. High dependence on indirect taxes especially VAT
How Tax Policies Promote Unsustainable Economic Growth and Exacerbate Inequality in Latin America
Tax Policies
Figure: International Comparisons of the Tax Burden in 2006 (% of GDP)
How Tax Policies Promote Unsustainable Economic Growth and Exacerbate Inequality in Latin America
Tax Policies
3. Economic rents are taxed very little if at all
How Tax Policies Promote Unsustainable Economic Growth and Exacerbate Inequality in Latin America
Tax Policies
4. High tax evasion, especially income taxes; evasion rates of
40-70% of income taxes
How Tax Policies Promote Unsustainable Economic Growth and Exacerbate Inequality in Latin America
Tax Policies
5. High levels of ”tax expenditures”: Tax loopholes costing 2-5%
of GDP or 10% to 30% of all tax revenues.
Figure: Tax Expenditures in Latin America (% of GDP)
How Tax Policies Promote Unsustainable Economic Growth and Exacerbate Inequality in Latin America
Tax Policies
6. No pollution taxes (and little enforced regulation)
How Tax Policies Promote Unsustainable Economic Growth and Exacerbate Inequality in Latin America
The Role of the State
Far from correcting market failure and historical conditions tax
policies contribute to exacerbate them:
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1. Over reliance on indirect taxes magnify the impact of
liquidity constraints affecting households investment in human
capital
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2. Taxes worsen inequality: after-tax gini coefficient is not
better than pre-tax gini
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3. Low expenditures in education, health care and other
public goods as a consequence of the insufficient tax revenues.
How Tax Policies Promote Unsustainable Economic Growth and Exacerbate Inequality in Latin America
The Role of the State
4. Have intensified the economy’s dependence on dirty goods
which often implies that the economy is over dependent on
industries that have a relatively low potential for total factor
productivity growth.
How Tax Policies Promote Unsustainable Economic Growth and Exacerbate Inequality in Latin America
The Role of the State
Figure: The Share of Dirty Goods Produced by Region (LA, SSA, Asia)
How Tax Policies Promote Unsustainable Economic Growth and Exacerbate Inequality in Latin America
Consecuences of market and goverment failure
1. TFP has in fact grown very sluggishly in the Region
How Tax Policies Promote Unsustainable Economic Growth and Exacerbate Inequality in Latin America
Consecuences of market and goverment failure
How Tax Policies Promote Unsustainable Economic Growth and Exacerbate Inequality in Latin America
Consecuences of market and goverment failure
2. High dependence on dirty goods is not conducive to economic
growth
How Tax Policies Promote Unsustainable Economic Growth and Exacerbate Inequality in Latin America
Consecuences of market and goverment failure
3. Pollution intensity has fallen very slowly which in fact implies
that total levels of pollution have increased over the last few
decades.
How Tax Policies Promote Unsustainable Economic Growth and Exacerbate Inequality in Latin America
Consecuences of market and goverment failure
Figure: SO2 Pollution Intensity
How Tax Policies Promote Unsustainable Economic Growth and Exacerbate Inequality in Latin America
Consecuences of market and goverment failure
Figure: PM10 Pollution Intensity