Should the rich pay the price of the Coronavirus pandemic? An analysis of progressive taxation in Latin America

By Gretel Cuevas Verdin
Latin America analyst

As the economic crisis worsens in the world’s most unequal region, countries across Latin America are advancing progressive tax initiatives that target the most privileged sectors of society. In the face of the worst economic crisis in two centuries caused by the pandemic, taxing the rich has become the logical solution in many countries in the region.¹ From laws that intend to tax depending on an individual’s net worth in Chile and Mexico, to a new wealth tax proposal in Colombia, Argentina, and Bolivia, progressive taxation is part of the strategy that governments have found to compensate the regional 79% debt increase and concurrent fall in GDP, all of which have contributed to reduced tax revenue. The International Monetary Fund has also called on higher taxes for corporations and high-income individuals intending to reduce inequality. But are the rich supposed to cover the cost of the Covid-19 crisis? What implications could this measure have in the economic progress of the region? Is progressive taxation the solution to reduce the region’s inequality during such unprecedented times?

For a long time, tax scholars such as Berens & von Schiller², Bird & Zolt³, and Lustig⁴ have argued in favor of using taxation to alleviate inequality and redistribute income within developing countries.⁵ According to Bird & Zolt, income equality is a crucial element to increase productivity and consumption, as well as to reduce crime and violence. This theory suggests that tax policy has a direct effect in reducing income inequality as it can help raise revenue to fund government activity, incentivise certain behaviors, and correct market imperfections.

Most Latin American countries have already implemented forms of progressive income tax, however, the recent legislative trends indicate that this could go further. Currently, tax revenue in Latin America and the Caribbean averaged the equivalent of 23.1% of GDP in 2018, compared to the OECD average of 34.3%.⁶ Colombia implemented its first progressive tax in 2002 of 1% on net worth over $1.3 million, but since the pandemic started the national government has mandated a three-month “solidarity tax” on public sector worker wages over 10 million pesos a month (around $2,500 US dollars).⁷ In Chile, Congress is considering imposing  a one-time tax of 2.5 percent on equity of individuals with fortunes of US$22 million or above. Similarly, Peru’s Presidential candidate Verónika Mendoza is proposing imposing a one-percent tax on individuals with more than US$100 million in assets.⁸ In Mexico, lawmaker Alfonso Ramírez Cuéllar is proposing a one-time tax that would affect 160,000 people and collect as much as $5 billion US dollars. In a similar fashion, in Uruguay, where the government already taxes individuals with a net worth of over US$112,000, opposition lawmakers plan to implement a temporary two percent tax on offshore financial assets held by Uruguayans.⁹

The tax burden has been a continued economic and social debate as the concerns of capital-flight and decreased business productivity come face to face with an unprecedented social crisis where the poor have been disproportionately affected. Standard macroeconomic logic would suggest that taxes should be cut rather than increased during a recession, however, the crisis we are currently living in doesn’t look like the previous ones. The coronavirus crisis has put everything on hold causing severe disruptions in the world’s healthcare, education, and economic systems that cannot be fixed with a Keynesian strategy of increased spending and reduced tax.

Opponents of progressive tax policies classify them as unfair and use the benefit principle to argue that the poor, who tend to benefit from the government’s programs, should pay a higher tax rate. However, in reality, it is the poor who have paid the worst costs of this pandemic. Overcrowded housing, lack of clean water and sanitation facilities, informal jobs, fragile incomes, and lack of access to healthcare and education are the price they pay for the taxes the richest refuse to pay. According to the GAVI Vaccine Alliance, people in the poorest wealth quintile have a 32% more probability of dying compared to the richest of society. Furthermore, Oxfam reported that Latin America’s 73 billionaire fortunes surged by $48.2 billion since the beginning of the pandemic, even though the region has been one of the most affected. On the other side of the spectrum, the total number of people living in conditions of poverty rose to 209 million by the end of 2020, a 22 million increase, according to the Economic Commission for Latin America and the Caribbean.¹⁰

Latin American governments have for long undertaxed the wealthiest sectors of society, while the middle-and-low-income sectors pay high sums relative to the benefits they receive from the highly underfunded welfare system. However, the pandemic has brought back the conversation of progressive taxation to the table as this may be the only option governments have to get through a crisis that is still far from over.

References

1. Buenos Aires Times. “Tax-the-rich initiatives gain support across … – Buenos Aires Times.” 8 Apr. 2021, https://www.batimes.com.ar/news/economy/tax-the-rich-initiatives-gain-support-across-latin-america.phtml. Accessed 9 Apr. 2021.

2. Berens, S. & von Schiller, A. (2017). Taxing higher income: What makes high-income earners consent to more progressive taxation in Latin America? Polit Behav, 39, 703.

3. Bird, R. M. & Zolt, E. M. (2005). Redistribution via taxation: The limited role of the personal income tax in developing countries. UCLA Law Review, 52, 1627-1695.

4. Lustig, N. (2016). Inequality and fiscal redistribution in middle income countries: Brazil, Chile, Colombia, Indonesia, Mexico, Peru and South Africa. De Gruyter, 7(1), 17-60.

5. Balduzzi, B. (2018) “Progressing Towards an Equal and Growing Latin America | Cornell ….” 26 Feb. 2018, https://www.johnson.cornell.edu/article/emerging-markets-institute/research/emi-at-work/47289/progressing-towards-an-equal-and-growing-latin-america-an-argument-for-progressive-tax-to-redistribute-income-and-reduce-inequality/. Accessed 9 Apr. 2021.

6. OECD et al. (2020), Revenue Statistics in Latin America and the Caribbean 2020, OECD Publishing, Paris, https://doi.org/10.1787/68739b9b-en-es.

7. “Gobierno Nacional expide el Decreto 568, mediante el cual se crea ….” 16 Apr. 2020, https://id.presidencia.gov.co/Paginas/prensa/2020/Gobierno-Nacional-expide-el-Decreto-568-mediante-el-cual-se-crea-el-Impuesto-Solidario-por-el-covid-19-200416.aspx. Accessed 9 Apr. 2021.

8. Buenos Aires Times.

9. O’Boyle, B. (2021) “Latin America’s Plans to Tax the Rich – Americas Quarterly.” 7 May. 2020, https://www.americasquarterly.org/article/latin-americas-plans-to-tax-the-rich/. Accessed 9 Apr. 2021.

10. CEPAL. “Pandemic Prompts Rise in Poverty to Levels Unprecedented in ….” 4 Mar. 2021, https://www.cepal.org/en/pressreleases/pandemic-prompts-rise-poverty-levels-unprecedented-recent-decades-and-sharply-affects. Accessed 9 Apr. 2021.