Tax Reforms and Fiscal Stabilisation in Latin American Countries
Tax Policy Conference, p. 569, 2003
32 Pages Posted: 3 Jun 2012
Date Written: April 3, 2003
Abstract
Ricardo Martner and Varinia Tromben examine tax policy in Latin America in the fiscal policy context of the area. They describe the structure and the recent evolution of tax systems in Latin America pointing to similarities and national peculiarities. During the Nineties the revenue to GDP ratio increased substantially in most countries but remained much lower than in the OECD area. VAT became the main source of tax collection in the area, while the role of income taxation remained relatively small. In spite of the substantial progress of tax systems in the last decade, in several countries the situation of public finances remains problematic. The deceleration of economic growth and the reversion of capital flows contributed to the significant increase in public spending. In several countries a large proportion of fiscal revenues has been absorbed by interest payments, while the primary balance is significantly worse than that required for stabilising the debt. Moreover, policies targeting the short-term deficit has frequently given rise to pro-cyclical public expenditure policies. According to Martner and Tromben, fiscal consolidation can only be attained with a substantial increase of tax levels, particularly through the reduction of tax evasion, tax exemptions and tax expenditures. Given the significant vulnerability of tax collection to the economic cycle and the high volatility of output in Latin American countries, it would also be necessary to adopt a fiscal policy rule which combines medium-term credibility and short-term flexibility. Significant budgetary safety margins would be required.
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