The size of a country’s tax burden plays a significant role in its economic development. This year, the release of the Panama Papers resulted in a widespread challenge of tax shelters, or tax havens, along with the practices of tax evasion and tax avoidance. In the midst of the turmoil, however, people forgot to consider the voracious fiscal climate that continues to escalate in Latin America. A case in point is Argentina, whose leaders still have not closed the fiscal gap they inherited from the previous government, despite having the highest tax rates in the world. In this context, in the absence of a plan to reduce regulations and with the presence of a “tax cartel,” what role does the market play in alleviating tax burdens?
Taxation above a certain level becomes immoral and inefficient, often creating distortions in the decision-making process and affecting productivity at the corporate level. High taxes also have an impact on competitiveness, and even trigger the loss of investment opportunities — both local and foreign. The most interesting aspect, however, is that reckless tax levels make arbitrary spending possible and lead government officials to believe that they are meeting the “real” needs of people more efficiently than when those people simply care for themselves. In other words, taxpayers hand over their money so that the administrative state can make decisions for them, while distorting the incentives that the market generates.
When the government’s fiscal voracity becomes unsustainable, businesses and citizens look for a way out and seek refuge under more favorable and convenient conditions, where their money can stay safe. Tax shelters are not dens for criminals, as the popular myth would have us believe. Holding money abroad is absolutely legal, as long as it comes from lawful activities. Few people are willing to offer their income to increase the revenues of a gluttonous state, so tax shelters are not merely a matter of preference but of necessity.
These tax shelters do not harm the most vulnerable people in society, as is commonly believed. What really hurts the poorest people are the countless regulations and taxes that weigh down on them. Tax shelters are a benefit to any society that enjoys an environment of fair competition. According to Oxfam, business investment in tax shelters quadrupled between 2000 and 2014. Currently, the hidden money reaches US$7.6 trillion and exceeds the GDP of the United Kingdom and Germany combined. Also, nine out of 10 multinational companies have accounts in tax shelters. If that money were poured into the economy, there would be more companies, more work, and less poverty. There would be no more excuses for funding a giant administrator and auditor state.
According to the report “Fiscal Panorama of Latin America and the Caribbean,” by Economic Commission for Latin America and the Caribbean (ECLAC), the tax burden in Latin America increased last year by 0.2 percentage points of GDP. The agent behind this “progress” — as ECLAC calls it in the report — is an increase in revenues coming from income taxes. In 2015, public revenue from income taxes grew significantly in Argentina (12.8 percent), Chile (15.6 percent), Costa Rica (13.6 percent), Ecuador (11.7 percent), and Mexico (24.0 percent). In contrast, notable reductions in income tax revenues occurred in Brazil (-6.1 percent), Guatemala (-6.4 percent), and Peru (-16.5 percent). However, as stated in the report, the level of tax burden is higher in Argentina, Bolivia, and Brazil when compared to countries with a similar GDP.
An analysis from the World Economic Forum holds that Latin America has the highest levels of inequality in the world. One primary reason for this is that Latin American countries tend to have archaic and dysfunctional tax systems. In order to achieve sustained development, the analysis argues, it will be necessary to adjust and modernize these tax systems.
Meanwhile Argentina has gone the extra mile to stand out from the crowd. According to the latest Global Competitiveness Report of the World Economic Forum, Argentina is the country with the highest total tax rate in the world, including income and payroll taxes. Along with Italy, it is one of the countries where taxation most discourages investments. In addition, Argentina has the fourth-highest corporate tax rates in the world. According to a report published by the Tax Foundation in August 2016, the rate reached 35 percent. At the top of the list, we find the Arab Emirates (55 percent), Puerto Rico (39 percent) and the United States (38.9 percent). Meanwhile, South America (27 percent) is well above the world average. This useful information should be taken into account by countries hoping for investors to boost economic growth.
A report published by Instituto Argentino de Análisis Fiscal (IARAF) found that the formal comprehensive tax burden during 2016 would fall between 47.5 and 57.9 percent of total household income. This total includes employer social security contributions, as well as direct and indirect taxes charged by governments at the federal, provincial, and municipal levels. In other words, Argentineans in the formal sector work the first seven months (211 days) of the year to pay for their share of the state, and only get to keep the salary of the remaining five months for themselves. Only four years earlier, in 2012, a formal salaried worker had to work only five months (171 days) to pay for all the taxes charged by the different levels of government. The current effective tax burden —the funds that the state actually raise — has grown significantly in the last 15 years. In 2000, tax collections at all three levels of government in Argentina amounted to 21.4 percent of GDP. Currently, that percentage reaches 35 percent, which means that the country’s tax burden has grown by 60 percent during the last 15 years.
For the time being, Argentina is the opposite of a tax haven — a tax hell. It has reached the worst rankings in the world. It is important for its representatives to understand that public finances can improve, but this will only happen if there is more economic activity and less taxation. Furrent President Mauricio Macri has promised to discuss tax reform in the 2017 budget, as well as a proposal for a new fiscal target to drop GDP fiscal deficit by a point and half.
Not all government spending hinders economic development. The protection of property rights and enforcement of the rule of law can enhance economic growth. When countries maintain expansive welfare states, however, the high tax burdens that sustain them slow down the engines of economic growth.
According to Cato Institute economist Daniel J. Mitchell, tax havens are a disincentive to unlimited tax increases. They have an important role in the liberalization process because they work as a kind of tax competitor. If tax havens did not exist, governments would have complete power over tax burdens and it would be impossible to escape their voracity.
It is necessary to stop viewing offshore investments as evil. Governments that hope to curb tax evasion must focus on lowering their rates and reforming their tax systems, rather than wiping out tax havens. Ultimately, open markets offer better terms than governments that won’t face up to their unhealthy tax systems, and help keep more resources productively invested.