Can the wealth of Latin America be taxed?

We often hear the phrase: “Latin America is the most unequal region in the world” And although the available data seem to support this assertion with respect to income, it is necessary to recognize that we know very little about wealth inequality. We can only extrapolate that the levels of inequality that we observe in the flow are translated, also, into high levels of inequality in the stock, that is to say, in the levels of wealth or assets accumulation.

Piketty, the contemporary economist of the inequality, after dedicating hundreds of pages of his admirable work (“Capital in the twenty-first Century”, 2014) proving that the world is now deeply and increasingly unequal, and that the wealth is increasingly concentrated, in a dangerous manner, puts forward solutions in the final Chapters of his work. One of his proposals suggests uplifting the Tax on Capital, in a coordinated global or at least regional form. According to the author this “would make possible to stop the spiral of inequality and at the same time would preserve the competitiveness and incentives to start new instances of accumulation”.

Certainly, more research is needed on the levels of wealth and their distribution, in particular for the region of Latin America. We must also delve deeper into the policy tools that can help to reducing inequality, for example, the role of the taxes on net worth.  This is critical in an era in which fewer and fewer countries use this type of tax to enhance the fairness of their tax systems: Four in Latin America and the Caribbean (Argentina, Colombia, Guyana and Uruguay) and 5 European countries as Spain, Italy -with a sui generis formula-, Luxembourg, Norway and Switzerland.

Until very recently, France was also part of this group. The arguments to suppress the tax in France echo what we might call the “vicious circle of wealth taxation”, namely: a bad design, allowing all types of exceptions (for example the usual housing, the family limited partnerships shares, certain forms of financial savings…), leads to a low tax collection; and a low tax collection reduces the political interest for the tax. The circle is completed easily, since a low political interest allows a greater pressure from lobbies to narrow the taxable assets (more exceptions). Of course, the justifications for its suppression can also be presented in a more academic form, citing the distortions on investment and savings that the tax may cause, and the resulting harm on economic growth.

However, there is an ever increasing evidence of the harm caused by inequality on growth. In contexts of rising inequality, the role and socio-economic function of a tax on wealth should be very different from the current situation. So much so that the conceptual framework for evaluating the effects of such a tax should be expanded and transcend the traditional  neoclassical scheme. That is to say, to update Okun’s trade-off between efficiency and redistribution to consider the dynamic effects of redistribution on a more extensive time horizon, where the decrease of inequality generate systemic productivity increases.

In this working paper:  “Taxes on Wealth or on the assets of individuals with particular reference to Latin America and The Caribbean” published by the inter-American Center of Tax Administrations (CIAT), we intend to contribute to this discussion. We do so by simulating the distributions of the net assets and analyzing the redistributive role that a tax on the net worth with progressive rates lower than 1.9% and focused on the wealthiest decile could have, both on the distribution of the assets and on the tax system as a whole, in 5 countries of Latin America. Along with a general review of the Taxes on Wealth in the World and their normative aspects, both economic, tax-technical and legal, we explore different forms of wealth taxation, opting finally for a balanced form of taxation, to move away from populist positions and frame this type of tax within a debate in which the losses in efficiency are outweighed by the benefits of increased equality.

In conclusion, rethinking taxation on wealth requires moving away from the classic legal and political conceptual framework, and making a qualitative leap, fully permitted (and even encouraged) by the state of the technique, by the political cooperation in the field of taxation and because of the dangerous reality of growing inequality that we live in.

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Disclaimer. Readers are informed that the views, thoughts, and opinions expressed in the text belong solely to the author, and not necessarily to the author's employer, organization, committee or other group the author might be associated with, nor to the Executive Secretariat of CIAT. The author is also responsible for the precision and accuracy of data and sources.

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