If taking in more tax and spending it well are different things, so are raising tax and doing so equitably. The way Latin America raises its taxes is noticeably different to the OECD’s average tax profile (see chart). Indirect consumption taxes—VAT, export taxes, and so on—account for around 50% of the tax take in the region, compared with a figure of around 30% among OECD members. Taxes on income and social-security contributions make up around 40% of revenues in Latin America, compared with 60% of OECD tax revenues. The sorts of income taxes that the region collects are also different from the members of the rich-world club (Chile and Mexico straddle both groups): corporate-income taxes matter more to Latin America, personal-income taxes more to the OECD.
There are decent reasons for the region’s distinctive tax structure, says Christian Daude of the OECD. Consumption taxes are easier to collect than income taxes, for one thing. The number of people with enough money to pay personal-income tax, given high minimum thresholds, is relatively small. The commodities boom propelled taxes paid by natural-resources companies higher.
But there are drawbacks to this structure, too. Commodities-linked revenues tend to be volatile. And sales taxes are regressive, which matters in a region with such high rates of inequality. According to a World Bank report in 2013, taxes and transfers reduce the Gini coefficient, a measure of inequality that runs from 0 (everyone has the same income) to 1 (one person has all the income), in the OECD countries by 14 points: the Gini score before taxes and transfers stands at 0.45 and drops to 0.31 after the state has grabbed its share. In Latin America, there is virtually no such redistributive impact. Uruguay is the country that reduces the Gini coefficient by most, but only from 0.49 to 0.46.
