## Introduction and Key Results ## Source details **Canonical URL:** [Introduction and Key Results](https://www.imf.org/-/media/files/publications/reo/whd/2021/english/ch2.pdf) ## Other formats - [Markdown version](/-/media/files/publications/reo/whd/2021/english/ch2.pdf.md) - [Structured JSON version](/-/media/files/publications/reo/whd/2021/english/ch2.pdf.json) --- ### Overview and context - The COVID-19 shock exacerbated pre-existing fiscal challenges in Latin America and the Caribbean (LAC); public debt levels were already on the rise before the pandemic (IMF 2021a). - Ongoing fiscal pressures: continued COVID-related expenses (health, education and transfers); additional fiscal costs from monetary policy normalization and/or realization of contingent liabilities; structural expenditure pressures due to aging. - Fiscal policy in LAC is described as not progressive enough given development levels and societal preferences (Cárdenas and others 2021). ### Key empirical findings - LAC exhibits a substantial gap relative to OECD countries in tax revenue collection and a tax structure biased toward indirect taxes. - Direct taxes: - Low revenue yield in LAC is mostly explained by large gaps in PIT collection. - LAC’s collection of CIT significantly exceeds that of the average OECD country. - Informality and administration: - Reductions in labor informality and improvements in tax administration have occurred; VAT and CIT collection have trended upwards in many LAC countries. - Moderate increases in PIT revenue generally observed. - Growth associations: - VAT is more growth friendly than the PIT in LAC. - Adverse growth effects of the PIT can be mitigated when PIT is well designed and enforced. - The CIT has detrimental growth effects; LAC’s strong reliance on the CIT has likely affected growth adversely. ### Quantitative tax structure and collection statistics (2005–2019 and 2019) - Total revenue including social security contributions increased from 19.4 to 22.4 percent of GDP between 2005 and 2019. - OECD average over the same period: 35.5 percent of GDP. - Tax structure, 2019 (LAC value ; OECD value): - Value added taxes: 6.3 ; 7.2 - Personal income taxes: 2.3 ; 8.8 - Corporate income taxes: 3.7 ; 2.8 - SSCs and payroll taxes: 4.0 ; 10.2 - Other taxes: 6.1 ; 7.0 - Total tax revenue: 22.4 ; 35.5 - PIT collection: average LAC country collects about one-quarter of what the average OECD country does in terms of the PIT. - LA7 countries: Argentina, Brazil, Chile, Colombia, Mexico, Peru, Uruguay. *Source: IMF — ch2 - Introduction and Key Results* --- ### Growth effects of VAT, PIT and CIT — empirical evidence and interpretation ### Methodology and samples - Focus: VAT, PIT, CIT (more than half of total tax collection in LAC and OECD as of 2019). - Empirical methods: pooled mean group (PMG) and mean group (MG) on annual observations. - Samples: - LAC: 16 countries, period 1992–2019. - OECD: 33 countries, period 1972–2019. ### Core long-run PMG coefficients (reported) - Total taxes/GDP: - LAC: 0.238*** - OECD: -0.108*** - Other taxes to ensure tax neutrality/Total taxes: - LAC Col.1: -0.00950 - LAC Col.2: -0.199*** - LAC Col.3: -0.173*** - OECD Col.4: -0.0325* - OECD Col.5: -0.0583** - OECD Col.6: -0.0747*** - Value added taxes/Total taxes: - LAC Col.1: 0.189*** - LAC Col.2: 0.0259 (not significant) - Income taxes/Total taxes: - LAC Col.1: -0.189*** - LAC Col.2: -0.0259 (not significant) - Personal income taxes/Total taxes: - LAC Col.3: -0.230*** - OECD Col.6: -0.0198 - Corporate income taxes/Total taxes: - LAC Col.3: -0.165*** - OECD Col.6: -0.0593* - Investment rate coefficients: - LAC: 0.0218–0.0239 - OECD: 0.0272 (Cols 4–5); 0.0141 (Col.6) - Employment growth coefficients: - LAC: 0.0534, 0.0305 - OECD: 0.398*** (Cols 4–5); 0.378*** (Col.6) - Government consumption: - LAC: -0.146** to -0.114* - OECD: -0.150*** to -0.165*** - Error-correction coefficient (φ): - LAC: -0.818*** to -0.805*** - OECD: -0.911*** to -0.899*** - After-GFC dummy: - LAC Cols 1–2: -0.00618** - OECD: -0.0127*** to -0.0121*** ### Interpretation and quantified example - In LAC, reallocating revenue from income taxes to VAT is associated with higher long-term growth: VAT/Total taxes coefficient 0.189*** (LAC Col.1). - Example: A reallocation of 1 ppt of total taxes from income taxes to VAT could boost long-term growth by 0.189 ppt in the LAC sample. - This implies average GDP per capita growth would go from about 2 percent to about 2.2 percent over the long run. - 1 ppt of total tax revenue collection in LAC equals about 0.21 percent of GDP. - OECD results: CIT appears more harmful for growth relative to VAT; PIT and VAT have similar growth effects when PIT is well designed and enforced. ### Why tax-growth impact differs between LAC and OECD (key factors) - Enforcement and administrative capacity differences. - Tax design features: poorly designed VAT (exemptions, differentiated rates) can be growth-retarding; well-designed PIT can be growth-friendly. - LAC tax systems: narrow bases, exemptions, enforcement problems, tax incentives, reduced rates—creating complexity and rent-seeking. *Source: IMF staff calculations and Annex 2 empirical content.* --- ### The PIT in LAC — collection, design flaws, micro-simulations, and implications ### PIT coverage and design features - Average PIT revenue-to-GDP ratio: - LAC: 2.3 percent - OECD: 8.8 percent - Statutory tax rates in LAC are lower than OECD peers; income levels at which rates apply are higher in LAC. - Design factors eroding PIT base in LA7 and other LAC: - Widespread allowances, exemptions, deductions for SSCs and dependents reduce the PIT base. - Standard deductions, exemptions, and credits substantially reduce effective PIT rates, often lowering them to zero even for workers with relatively high income (relative to GDP per capita) in many countries (except Mexico and Uruguay). ### Microdata approach (LA7 worker-level simulations) - Worker-level microdata from household/labor surveys for LA7 countries (2019 or 2018 adjusted to 2019 CPI) applied tax codes to impute effective PIT liabilities for formal workers aged 18–65. - Assumptions: reported income net of taxes and SSCs; annualize monthly amounts by multiplying by 12; impute deductions, exemptions, credits from country tax codes and EYGM 2019–2020 PIT scales; use ILO definition of formality. ### PIT coverage outcomes (formal workers) - Share of formal workers subject to PIT: - Argentina, Brazil, Chile, Peru: 20 percent - Colombia: 4 percent - Mexico and Uruguay: larger shares (exceptions) - These shares are upper bounds (assume full compliance); shares would be smaller when considering total employment (including informal). - Labor informality rates, 2019: - Uruguay: 24 percent - Peru: 68 percent ### Effective labor taxation, SSCs, and tax wedges - Including SSCs and correcting for informality, effective tax rate on formal employment is significantly higher than PIT alone suggests. - Effective tax rate on labor in LAC converged toward OECD level between 2005 and 2019; in CAPDR it surpassed OECD level. - Using OECD labor tax wedge definition, SSCs in LA7 make formal employment costs comparable or higher than OECD; low PIT incidence lowers formal labor costs relative to OECD (Mexico is an exception). - Any PIT revenue increase must internalize interactions with SSCs and effects on formality and labor supply. ### Reform experiments: removing deductions and adding an EITC (micro-simulations) - Scenario 1: Remove all deductions from PIT code; keep statutory rates and thresholds unchanged. - Scenario 2: Scenario 1 plus an EITC for low-income earners based on the US EITC scheme replacing existing labor subsidy programs (not other transfers). - Main outcomes (nominal PIT revenue changes and distributional effects): - Mexico: 20 percent increase in revenues (Scenario 1). - Peru: 4.5-fold increase in revenues. - Brazil and Chile: increases of around 50 percent. - Colombia: approximately 100 percent increase. - EITC partially offsets revenue increases, particularly in Chile and Colombia. - Reform increases progressivity: larger PIT rate gap between average taxpayer and top 10 percent; Gini coefficient declines in all cases except Mexico. - Eliminating deductions generally lowers 90th/75th income ratio; EITC tends to lower 50th/25th by raising lower-tail earnings. - Mexico exception: 50th/25th ratio rises due to the existing Subsidio al Empleo generosity; modeled EITC only partially compensates. - Labor supply and formality: - EITC likely increases labor supply and formality by partially compensating SSCs and providing clear formal-sector incentives. - Transition of informal workers into formality to claim the EITC (not explicitly modeled) would likely reduce poverty and extend social security coverage. ### Non-labor income taxation - Non-labor income (rental, dividends, other capital income) accounts for over 10 percent of total household income in the top deciles in the average LAC country. - Household surveys understate true incidence of non-labor income. - Improving taxation of non-labor income could increase revenues and achieve redistributive goals without affecting labor force participation incentives. *Source: ch2 — "Without Deductions" and related PIT analysis.* --- ### Corporate Income Tax (CIT) and Value-Added Tax (VAT): collection, rates, productivity, and policy ### CIT revenue and statutory rates (LA7 and LAC patterns) - CIT yields around 3.7 percent of GDP in LA7/LAC as of 2019, almost 1 ppt of GDP above OECD countries in that year. - Drivers of CIT revenue uptick (2005–19): higher commodity prices; increases in statutory rates (example: Colombia); base-broadening efforts. - Uruguay example: CIT revenue increased despite reduction of statutory rates from 30 percent in 2005 to 25 percent in 2019. - Average CIT statutory rate in LA7: 29.5 percent in 2019. - Average CIT statutory rate in the Caribbean: 20.1 percent in 2019. ### CIT productivity and base erosion - Definition: CIT ‘productivity’ = revenue collection (percent of GDP) per percentage point of CIT statutory rate. - Observed: CIT productivity higher than OECD in Chile and Uruguay; subdued in Argentina and Brazil despite above-average statutory rates, suggesting base erosion. - Drivers of base erosion: generous tax incentives; profit shifting (transfer mispricing, debt shifting); digital economy and intangible assets complicating profit location. - International context: OECD/G20 BEPS Pillar 1 and 2 initiatives may affect regional corporate tax design. ### VAT collection, statutory vs effective rates, and gaps - VAT collection in LA7 broadly stable at around 6.6 percent of GDP (2005–19). - VAT collection in OECD broadly stable at around 7.2 percent of GDP (2005–19). - VAT statutory rates hover around 19 percent in LA7 and the OECD. - VAT effective rates: - LA7: 9 percent. - OECD: 11.4 percent. - Remaining LAC countries: - Average VAT standard rate: 13.5 percent. - Average effective VAT rate: 7.4 percent. - All-LAC (incl. LA7) VAT statutory and effective averages for 2019: 15.5 and 8.0 percent. - C-efficiency and policy/compliance gaps in 2019: 56.8 and 43.2 percent. - Causes of statutory–effective gaps: policy gap (reduced rates, exemptions, zero-rating) and compliance gap (evasion among informal vendors). ### Policy implications for CIT and VAT - CIT: - Broaden base by streamlining tax benefits and deductions; limit interest deductibility where appropriate; strengthen transfer pricing rules. - Preserve uniform, rules-based investment incentives (accelerated depreciation, expensing) to reduce investment cost where efficient. - Align statutory rates with other regions if assessed relatively high; evaluate country-specific implications of global corporate tax reforms. - Use special fiscal regimes for natural resource rents when relevant. - VAT: - Tackle reduced rates and exemptions to simplify and improve efficiency. - Use targeted transfers to compensate vulnerable households and encourage electronic payments (example: Uruguay social card). - Bringing effective VAT rates closer to statutory rates via base broadening can yield revenue without raising statutory rates. - Taxing the digital economy may yield modest revenues but is important to avoid base erosion. *Sources: IMF, WEO database, OECD Tax Revenue Statistics, Tax Foundation, IMF staff calculations.* --- ### Other revenue sources, formalization, and sequencing of reforms ### Property, estate, and environmental taxes - Immovable property taxes (half of property tax revenue) in average LA7: 0.6 percent of GDP in 2019, 0.4 ppt below OECD average. - Collection gap especially large in Mexico and Peru: about 0.7 ppt of GDP in 2019. - Estate, inheritance, and gift taxes: seldom used; collections negligible; potentially less distortive and useful to tackle wealth inequality. - Environmental taxes (carbon taxes): efficient to reduce emissions, provide revenue, hard-to-avoid by informal sector—can support formalization and allow reductions in more distortive taxes. ### Formalization, digitalization, and C-efficiency - Formalization policies: electronic payments at VAT-compliant sellers can broaden VAT base and improve horizontal equity. - Informal transactions are often cash-based at non-VAT vendors and disproportionately involve poorer households. - Digitalization and e-commerce pose implementation challenges for a broad-based VAT, particularly across jurisdictions. ### Sequencing, political economy, and implementation considerations - Reforms must be tailored to country circumstances, tax administration capacity, sequencing, and political economy constraints. - Sequencing principles: - Reflect economic conditions and fiscal needs; support livelihoods and recovery currently. - Countries with tighter fiscal space may need early revenue steps; as pandemic recedes, timing may improve for broader reforms. - Avoid short-term revenue declines from reforms (some CIT changes may lower revenue initially). - Develop administrative capacity before expanding complex bases (e.g., broader PIT base). - Building public support: improve quality/composition of public expenditure, communicate reforms, involve stakeholders, and strengthen tax administration. ### Specific instruments highlighted - Earned Income Tax Credit (EITC) or comparable refundable credits to: - Incentivize labor-force participation and formalization. - Offset high SSCs for low-income formal workers. - Potentially reduce gender gap if properly designed. - Well-targeted transfers to compensate vulnerable households when broadening VAT base. - Electronic payment promotion linked to VAT compliance, mindful of distributional effects. - Revamped estate/inheritance taxes and carbon/environmental taxes as additional revenue sources. *Source: IMF staff analysis and chapter content.* --- *Italic: Source: ch2 (PDF chapter), IMF staff calculations and referenced sources as presented in the supplied content.* ### Introduction and Key Results ### Introduction and Key Results ### Overview and context - The COVID-19 shock exacerbated pre-existing fiscal challenges in Latin America and the Caribbean (LAC); public debt levels were already on the rise before the pandemic (IMF 2021a). - Ongoing fiscal pressures identified include continued COVID-related expenses (health, education and transfers), additional fiscal costs from monetary policy normalization and/or realization of contingent liabilities, and structural expenditure pressures due to aging. - Fiscal policy in LAC is described as not progressive enough given development levels and societal preferences (Cárdenas and others 2021). ### Key empirical findings - LAC exhibits a substantial gap relative to OECD countries in terms of tax revenue collection, and a tax structure somewhat biased towards indirect taxes. - Direct taxes inspection shows: - Low revenue yield in LAC is mostly explained by large gaps in PIT collection. - LAC’s collection of CIT significantly exceeds that of the average OECD country. - Informality and weak state capacity do not fully account for observed trends: - LAC countries have experienced sizable reductions in labor informality and improvements in tax administration. - Moderate increases in PIT revenue have generally been observed. - VAT and CIT collection have trended upwards and robustly so in many LAC countries. - Growth associations: - Results show that the VAT is more growth friendly than the PIT in LAC. - Adverse growth effects of the PIT could be mitigated when the PIT is properly designed and enforced. - The CIT has detrimental growth effects; LAC’s strong reliance on the CIT has likely affected growth adversely in the region. ### Quantitative tax structure and collection statistics (as reported) - Trends 2005–2019: - Total revenue including social security contributions increased from 19.4 to 22.4 percent of GDP between 2005 and 2019. - OECD average over the same period hovered around 35.5 percent of GDP. - Tax structure, 2019 (LAC value followed by OECD value as presented): - Value added taxes: 6.3 ; 7.2 - Personal income taxes: 2.3 ; 8.8 - Corporate income taxes: 3.7 ; 2.8 - SSCs and payroll taxes: 4.0 ; 10.2 - Other taxes: 6.1 ; 7.0 - Total tax revenue: 22.4 ; 35.5 - PIT collection: average LAC country collects about one-quarter of what the average OECD country does in terms of the PIT. - LA7 countries mentioned: Argentina, Brazil, Chile, Colombia, Mexico, Peru, Uruguay. ### Development, taxation, and structure - The analysis using a dataset for LAC and OECD countries (LAC: 1992–2019; OECD: 1972–2019) indicates: - The development process—proxied by real GDP (PPP) per capita (2017 prices)—is associated with higher tax revenues and a structure tilted toward direct taxation. - The development process appears highly associated with more reliance on the PIT within direct taxes. - Many LAC countries deviate from the pattern: several collect less revenue and have structures more tilted toward indirect taxes than their income levels would predict. - Cross-country comparability caveats: - Classification differences (taxable income assigned to individuals versus corporations) can affect cross-country PIT/CIT comparisons. - Social security contribution reporting differences (example: Chile) complicate direct comparisons. ### Policy reform options and design recommendations - General considerations: - Reforms must be tailored to country circumstances and embedded in a broader agenda that internalizes tax administration capacity, reform sequencing, and political economy constraints. - Personal Income Tax (PIT) reforms (evidence for LA7 countries): - Better PIT design could bring significant gains in collection and equity. - Simplifying the PIT by eliminating deductions disproportionately benefiting richer households would leave after-tax income of low- and middle-income individuals largely unaffected. - Potential adverse growth impacts could be mitigated with well-targeted incentives to labor force participation, such as an earned income tax credit (EITC). - An EITC could help reduce the gender gap if properly designed. - An EITC financed from PIT collection gains could provide incentives for labor formalization by compensating social security contributions, which almost entirely explain the labor “costs” or tax wedge of the average worker among LA7 countries. - Increasing the tax burden on certain non-labor income sources (e.g., capital gains) would raise PIT revenue and improve equity without affecting labor force participation decisions. - Corporate Income Tax (CIT) reforms: - Assess corporate taxation carefully because significant reliance on the CIT has hampered investment and growth. - Focus on broadening the base by streamlining tax benefits and deductions for horizontal equity and to prevent base erosion (examples: limitations on interest deductibility and transfer pricing regulations). - Preserve incentives that directly reduce the cost of investment (e.g., accelerated depreciation and investment expensing) if allocated uniformly and on a rules-based manner to all investors. - Align corporate statutory rates with those observed in other regions when assessed to be relatively high, to attract investment and alleviate profit shifting. - Evaluate country-specific implications of ongoing global corporate tax reforms (final agreement on key parameters of ongoing BEPS OECD/G20 global corporate tax reform efforts has been reached in October 2021, but implementation details are still pending). - Taxation of rents associated with natural resources could be tackled by designing special fiscal regimes as relevant. - Value-Added Tax (VAT) reforms: - Improve VAT by tackling reduced rates and exemptions to make it simpler and more efficient, particularly in countries with relatively high statutory rates. - Design of targeted transfers to compensate vulnerable households and encourage electronic payment methods (example: social card program in Uruguay) could foster formalization. - Estimates of additional revenue from levying the VAT on the digital economy appear modest, but taxing the digital sector as others is critical to avoid tax base erosion. - Other revenue options: - Untapped revenue sources to consider include taxation of immovable property, inheritance taxes, and environmental taxes. *Source: IMF — ch2 - Introduction and Key Results* ### 1. Value-added Taxes 2. Corporate Income Taxes 3. Personal Income Taxes ### 1. Value-added Taxes 2. Corporate Income Taxes 3. Personal Income Taxes ### Growth effects of consumption and income taxes — empirical findings - Context and methodology: - Analysis focuses on VAT, PIT, and CIT, which combined represent more than half of total tax collection in LAC and OECD countries as of 2019. - Empirical approach uses pooled mean group (PMG) and mean group (MG) methods (Pesaran, Shin, and Smith 1999; Pesaran and Smith 1995) on annual observations for a sample of 16 LAC (period 1992–2019) and 33 OECD (period 1972–2019) countries. - Exercise studies revenue-neutral tax reallocations; long-run coefficients are reported using the PMG method (Hausman p-values reported). - Core empirical results (long-run coefficients, PMG): - Total taxes/GDP: 0.238*** (Columns 1–3, LAC); -0.108*** (Columns 4–6, OECD). - Other taxes to ensure tax neutrality/Total taxes: -0.00950 (LAC, Col.1), -0.199*** (LAC, Col.2), -0.173*** (LAC, Col.3); -0.0325* (OECD, Col.4), -0.0583** (OECD, Col.5), -0.0747*** (OECD, Col.6). - Value added taxes/Total taxes: 0.189*** (LAC, Col.1); 0.0259 (LAC, Col.2; OECD, Col.5 shows 0.0259 but not significant). - Income taxes/Total taxes: -0.189*** (LAC, Col.1); -0.0259 (LAC, Col.2; OECD, Col.4 shows -0.0259 not significant). - Personal income taxes/Total taxes: -0.230*** (LAC, Col.3); -0.0198 (OECD, Col.6). - Corporate income taxes/Total taxes: -0.165*** (LAC, Col.3); -0.0593* (OECD, Col.6). - Investment rate coefficients: 0.0218–0.0239 (LAC); 0.0272 (OECD Columns 4–5); 0.0141 (OECD Col.6). - Employment growth coefficients: 0.0534, 0.0305 (LAC); 0.398*** (OECD Columns 4–5); 0.378*** (OECD Col.6). - Government consumption: -0.146** to -0.114* (LAC); -0.150*** to -0.165*** (OECD). - Error-correction coefficient (φ): -0.818*** to -0.805*** (LAC); -0.911*** to -0.899*** (OECD). - After-GFC dummy: -0.00618** (LAC Columns 1–2); -0.00340 (LAC Col.3 not significant); -0.0127*** to -0.0121*** (OECD). - Interpretation and implications: - In the LAC sample, reallocating revenue from income taxes to the VAT is associated with higher long-term growth: VAT/Total taxes coefficient 0.189*** suggests growth boost from such reallocations in LAC but not significant in OECD (VAT coefficient not significant in OECD Column 4). - Disaggregating income taxes shows both PIT and CIT are significantly more growth-distorting than the VAT in LAC; the CIT has a somewhat smaller point estimate than the PIT in LAC but remains growth-retarding. - In the OECD, the CIT appears more harmful for growth relative to the VAT, while the PIT and VAT have similar growth effects when PIT is well designed and enforced. - The after-GFC dummy is negative and highly significant in OECD (and partly in LAC), indicating trend growth decreased after the global financial crisis. - Robustness: Results hold under various checks (removal of contemporaneous effects, different subsamples, and elimination of certain controls). - Quantified example provided in the chapter: - A reallocation of 1 ppt of total taxes from income taxes to the VAT could boost long-term growth by 0.189 ppt in the LAC sample. - This implies average GDP per capita growth would go from about 2 percent to about 2.2 percent over the long run. - The reallocation magnitude is sizable: 1 ppt of total tax revenue collection in LAC equals about 0.21 percent of GDP. ### Why the tax-growth impact differs between LAC and OECD - Key factors: - Enforcement and administrative capacity: OECD countries typically have lower informality and better capacity to design and enforce income taxes. - Tax design features: Well-designed and enforced PIT can be growth-friendly and progressive; poorly designed VAT (e.g., with exemptions and differentiated rates) can be growth-retarding. - LAC tax systems suffer from narrow bases due to exemptions, enforcement problems, tax incentives, and reduced rates—making systems complex and less efficient, and fostering rent-seeking. - Policy takeaway: - Properly designed and enforced PIT could raise revenue in LAC at low growth cost and improve progressivity, but incentives for formal labor-force participation, especially for low-wage and female workers, must be in place. - The large reliance on CIT in LAC likely hampered growth; reforming CIT design (e.g., addressing debt bias) is important. ### The PIT in LAC — collection, statutory rates, thresholds, and design flaws - Key statistics and comparisons: - Average PIT revenue-to-GDP ratio: 2.3 percent for LAC countries versus 8.8 for the OECD average. - Statutory tax rates in LAC are lower than OECD peers; income levels at which rates apply (particularly the maximum rate threshold) are higher in LAC, implying a smaller fraction of household income is subject to PIT. - Design factors eroding PIT base in LA7 and other LAC countries: - Widespread allowances, exemptions, and deductions for mandatory social security contributions (SSCs) and dependents substantially reduce the PIT base. - These provisions can decrease the fraction of workers’ gross income subject to tax and lower effective tax rates; in many countries, the scope of these provisions is excessive. - In LA7 (Argentina, Brazil, Chile, Colombia, Mexico, Peru, Uruguay), apart from Mexico and Uruguay, standard deductions, exemptions, and credits substantially reduce effective PIT rates, often lowering them to zero even for workers with relatively high income (relative to GDP per capita). - Microdata analysis approach: - Worker-level microdata from household surveys for LA7 countries in 2019 are used. - For each formal worker, the country’s tax code is applied using self-reported net labor income and personal characteristics (marital status, number of children, employment/self-employment status) to impute effective PIT liabilities after a comparable set of deductions and exemptions (including SSCs and dependents). - Annex 3 provides computation details (not reproduced here). - Observed outcomes: - In the largest countries in the region, only a very small share of formal workers (private and public) pay PIT, and those who do face very low effective rates. - Deductions for expenses related to children, education, housing, health insurance, commuting, and charitable donations erode the base and tend to accrue disproportionately to the rich. - The regressivity of these deductions is larger where public-private provision choices (e.g., healthcare, education) correlate with income levels. ### Design considerations and reform implications (summarized) - Revenue and growth trade-offs: - Rebalancing towards consumption taxes (VAT) can be growth-friendly in LAC when achieved via revenue-neutral reallocations away from income taxes, per empirical evidence. - However, VAT design matters: a broad-base, uniform-rate VAT is less distortionary; exemptions and multiple rates can create efficiency costs. - PIT reform priorities for LAC: - Broaden PIT bases by limiting excessive allowances, exemptions, and deductions that disproportionately benefit higher-income households. - Lower thresholds and adjust statutory rates so a larger fraction of households’ income is subject to PIT while protecting low-wage and vulnerable groups. - Improve tax administration and enforcement to reduce informality and ensure better compliance. - Align tax incentives with formal labor-force participation, especially for low-wage and female workers, to capture more taxable income and support equity. - CIT reform priorities: - Address design flaws such as debt bias; consider allowances that neutralize debt-equity distortions to reduce negative growth impacts. - Limit narrow bases arising from exemptions and tax incentives that erode revenue and encourage rent-seeking. *Source: IMF staff calculations and analysis (chapter material on Value-added Taxes, Corporate Income Taxes, Personal Income Taxes).* ### 1. Without Deductions ### 1. Without Deductions ### PIT coverage and distributional incidence - Based on household survey micro-simulations (formal workers): - In Argentina, Brazil, Chile, and Peru only 20 percent of formal workers are subject to PIT payments. - In Colombia this share decreases to only 4 percent. - Mexico and Uruguay are exceptions with larger shares (Figure 7). - These shares would be even smaller when calculated over total employment (regardless of formality). - Potential taxpayers are highly concentrated in the upper 20 percent of the distribution of gross labor income, and average effective rates remain significantly below maximum statutory rates (Figure 7, panel 2). - Calculations assume full tax compliance and should be interpreted as an upper bound of the actual share of formal workers paying taxes. - Labor informality rates in the region (2019): - Uruguay: 24 percent - Peru: 68 percent ### Effective labor taxation, SSCs, and tax wedges - Once SSCs are included and corrections for labor informality are considered, the effective tax rate on formal employment is significantly higher than what the PIT alone would imply. - Adjusting for labor informality, the effective tax rate on labor in LAC has converged towards the OECD level between 2005 and 2019 (Figure 8, panel 1); in CAPDR it has surpassed the OECD level (Annex 1). - Using the OECD’s definition of the labor tax wedge, in LA7 countries the costs of formal employment associated with SSCs are comparable or even higher than in the OECD (Figure 8, panel 2). - It is the low incidence of the PIT in LA7 that reduces formal labor costs relative to the OECD; Mexico is an exception where the wedge is more evenly distributed between SSCs and the PIT. - Any attempt to increase PIT revenues must internalize interactions with SSCs and how both components affect formality levels and labor supply. - One policy option to offset SSCs “cost” for low-earning workers (those most likely to remain informal—particularly females) is to introduce earned-income tax credit (EITC) schemes, gradually phased out at higher income levels. ### Reform experiments: removing deductions and adding an EITC (micro-simulations) - Reform framing: - Scenario 1: Remove all deductions from the PIT code while leaving statutory rates and thresholds unchanged. - Scenario 2: Scenario 1 plus an EITC for low-income earners based on the US EITC scheme that replaces existing labor subsidy programs, but not other transfers. - These are illustrative, extreme scenarios to show ingredients of base-broadening and redistributive reform. - Main qualitative findings: - Eliminating all deductions and adding an EITC substantially increases nominal PIT revenues while reducing inequality in a meaningful way. - Stripping deductions to statutory rates yields substantial revenue increases: - Mexico: 20 percent increase in revenues. - Peru: 4.5-fold increase in revenues. - Brazil and Chile: increases of around 50 percent. - Colombia: approximately 100 percent increase. - The EITC partially offsets revenue increases, particularly in Chile and Colombia. - The reform increases the gap in the PIT rate faced by the average taxpayer relative to the top 10 percent in comparison with the baseline—making the system more progressive. - Measures of inequality (Gini coefficient) point to lower disparities in post-tax income in all cases except Mexico. - Elimination of deductions generally lowers the 90th/75th percentile income ratio while leaving the 50th/25th ratio unaffected relative to the baseline (because PIT incidence and associated deductions are greater for higher incomes). - The EITC tends to lower the 50th/25th ratio by raising earnings on the lower tail of the distribution. - In Mexico the 50th/25th ratio rises compared to the baseline after elimination of deductions because of the significant Subsidio al Empleo (a refundable tax credit) that served as income support for low-income workers; replacing it with the modeled EITC only partially compensates for its generosity. - Additional points on labor supply and formality: - Introduction of an EITC is likely to increase labor supply and formality because the credit partially compensates for SSCs and creates a clear incentive to work in the formal sector (Box 2). - If adequately calibrated, PIT reforms that simplify the code, broaden the base, and add an EITC would have positive effects on growth and equity while simplifying administration. - The potential transition of informal workers into formality to claim the EITC (a margin not explicitly modeled) would likely reduce poverty rates and make households eligible for social security benefits (pension, unemployment insurance). ### Non-labor income taxation - Non-labor income (rental, dividends, other capital income) accounts for over 10 percent of total household income in the top deciles of the income distribution in the average LAC country (Figure 9). - Household survey figures likely understate true incidence of non-labor income (misreporting, underrepresentation of top-income earners). - Improving taxation of non-labor income (expanding the base) could increase revenues non-trivially and, if well designed, achieve redistributive goals because capital income is more prominent among high-income households. - Taxing non-labor income would not affect the tax wedge and therefore would likely leave labor force participation incentives unchanged. ### Corporate income tax (CIT) context (brief) - The CIT yields around 3.7 percent of GDP in LA7/LAC as of 2019, almost 1 ppt of GDP above OECD countries in that year. - There is significant heterogeneity across LAC countries in reliance on corporate taxes and in statutory CIT rates. _Italic: Source: ch2 - 1. Without Deductions (PDF chapter), IMF staff calculations and referenced sources as presented in the supplied content._ ### 1. Revenue Collection 2. Statutory Rates 3. Statutory Rates and Productivity ### ch2 - 1. Revenue Collection 2. Statutory Rates 3. Statutory Rates and Productivity ### Revenue collection trends (2005-19) - LA7 countries experienced an uptick in average CIT revenue collection during 2005-19, driven by: - higher commodity prices; - increases in statutory rates (example: Colombia); - base-broadening efforts in some cases. - Example of revenue-strengthening amid rate changes: - Uruguay: CIT revenue increased despite the reduction of statutory rates from 30 percent in 2005 to 25 percent in 2019. - Several countries in LAC rely on special tax regimes and generous tax incentives and benefits to attract investment; such tax expenditures: - may be ineffective in guiding investment decisions; - draw down revenue and lead to inefficiencies in resource allocation; - make the tax system more complex and difficult to administer, compromising transparency and governance. - Suggested policy approach: - Strengthen investment-related incentives that directly reduce the cost of investment (for example, accelerated depreciation or investment expensing) using rules-based criteria rather than discretionary case-by-case measures. - Allowing investment that can be fully expensed immediately would make the CIT a cash-flow tax that falls on rents, thereby being more growth-friendly (with attention to transitional revenue losses in the short run). - Design special fiscal regimes to tax natural resource rents where relevant. ### Statutory rates: cross-country patterns and implications - Global trend: tax competition has led to reductions in statutory rates worldwide as part of a “race-to-the-bottom,” but: - In LA7 countries statutory rates have remained relatively stable over time and above the levels of other LAC countries and the OECD. - Heterogeneity within LAC: - Average CIT statutory rate in LA7: 29.5 percent in 2019. - Average CIT statutory rate in the Caribbean: 20.1 percent in 2019. - Tax incentives and exemptions: - LAC stands out in the generosity of tax benefits offered to businesses (e.g., longer tax holidays, more generous rate reductions). - Preferential treatment of certain investment returns in the PIT (for example, capital return on pension funds or on government bonds) may need rationalization or elimination to strengthen the PIT and ensure neutrality and efficiency. - Risks and behavioral responses to higher statutory rates: - Higher rates can undermine the corporate tax base through stronger incentives for evasion and profit shifting, particularly when enforcement capacity is limited. - Under perfect capital mobility, higher statutory rates could lead to lower capital stock, reducing the marginal product of labor and thus wages — though incidence could differ if higher rates also fall on rents. ### Statutory rates and CIT productivity - Definition: CIT ‘productivity’ measures revenue collection (in percent of GDP) per percentage point of the CIT statutory rate — useful to compare collection capacity, enforcement, and base broadness. - Observed productivity patterns among LA7 vs OECD: - CIT productivity is significantly above that of the OECD in Chile and Uruguay. - CIT productivity is more subdued in Argentina and Brazil, two countries with above-average statutory rates, suggesting significant erosion of the corporate tax base in these cases. - Drivers of corporate tax base erosion in LAC: - Generous tax incentives and tax expenditures. - Multinational companies’ profit shifting (transfer mispricing, debt shifting), facilitated by corporate tax territoriality. - The rise of the digital economy and intangible assets makes it more difficult to track the source of corporate profits, exacerbating revenue-raising challenges for higher-tax countries. - International reform context: - The OECD/G20 BEPS Pillar 1 and 2 initiatives may offer an opportunity to revisit corporate taxation design elements in the region and align them better with international standards. ### Value-added tax (VAT): collection, statutory vs effective rates, and gaps - VAT is the main tax revenue pillar in the region. - Comparative collection levels (2005-19): - VAT collection in LA7 was broadly stable at around 6.6 percent of GDP. - VAT collection in the OECD was broadly stable at around 7.2 percent of GDP. - Other LAC countries increased VAT collection by about 1 ppts of GDP during the period, supported by higher statutory rates and base broadening measures. - Statutory and effective VAT rates: - VAT statutory rates currently hover around 19 percent in LA7 and the OECD. - VAT effective rates: - LA7: 9 percent. - OECD: 11.4 percent. - Remaining LAC countries: - Average VAT standard rate: 13.5 percent. - Average effective VAT rate: 7.4 percent. - The Caribbean has one of the smallest gaps between statutory and effective VAT rates within LAC. - Gaps and causes: - Policy gap: reduced rates, zero-rate goods, and exemptions (often redistributive) contribute to statutory–effective rate differences (seen among OECD countries). - Compliance gap: significant evasion among “hard-to-tax” informal vendors largely explains the compliance gap in LA7, depressing effective VAT collection relative to statutory rates. *Sources: IMF, World Economic Outlook database; OECD Tax Revenue Statistics database; Tax Foundation Corporate Tax Rates around the world; and IMF staff calculations.* ### 1. Revenue Collection 2. Standard and Effective Rates 3. C-efficiency and Policy and Compliance Gaps ### ch2 - 1. Revenue Collection 2. Standard and Effective Rates 3. C-efficiency and Policy and Compliance Gaps ### VAT revenue collection, standard and effective rates, and C-efficiency - VAT statutory and effective averages for all LAC (incl. LA7) were 15.5 and 8.0 percent in 2019. - C-efficiency and the policy and compliance gaps together were 56.8 and 43.2 percent in 2019. - Brazil’s VAT statutory rate in 2019 is set at 17 (from Inter-American Center of Tax Administration (CIAT)). - VAT effective rates are calculated as total VAT revenue divided by total VAT-exclusive consumption (private and public) as reported in national accounts. - C-efficiency measures how much VAT is collected relative to what would ideally be collected if the VAT was imposed uniformly at the statutory rate on all final consumption. - LAC average C-efficiency is below OECD averages, with Chile as an exception. - Low C-efficiency in LAC captures design features introduced to address equity concerns (e.g., reduced rates and exemptions), but evidence suggests the richest households often benefit most from these tax expenditures in absolute terms. ### Findings on base-broadening, equity, digitalization, and informality - Broadening the VAT base by bringing effective VAT rates closer to statutory rates could yield additional revenue without changing statutory rates. - Equity objectives could be better achieved by broadening the base—leaving a small number of basic products at a reduced rate—and using additional revenue for well-targeted transfers and improving public goods. - Increasing C-efficiency by stripping down reduced rates and exemptions could improve resource allocation and foster growth. - A key consideration for base-broadening is compensating vulnerable households; compensation mechanisms targeting low-income households exist in the region, but middle-class households are sometimes left uncompensated, creating political-economy obstacles. - Measures that increase the share of “formal” transactions—leveraging electronic payment methods at VAT-compliant sellers—could broaden the VAT base and strengthen horizontal equity. - Informal transactions tend to involve a relatively larger fraction of poorer households and are often paid in cash at non-VAT compliant vendors; thus, formalization efforts should be combined with compensating, well-targeted transfers redesigned to encourage purchases at compliant retailers (example: Uruguay’s social card program). - Digitalization and the growth of e-commerce create implementation challenges for a simple, broad-based VAT, particularly when more than one jurisdiction is involved. ### Other tax revenue sources: property, estate, and environmental taxes - Immovable property taxes (roughly half of total property tax revenue) for the average LA7 country stood at 0.6 percent of GDP in 2019, which is 0.4 ppt below the OECD average. - The collection gap with respect to the OECD is particularly large in Mexico and Peru, at about 0.7 ppt of GDP in 2019. - Immovable property taxes are generally collected at the local/municipal level; improving collection requires coordination between central and subnational authorities and upfront costs to update cadasters and value properties, though technological innovations (e.g., satellite imagery) have likely reduced these costs. - Alternative property tax design options include a simple residential property area- and location-based tax on occupancy linked to the cost of benefits and basic services. - Taxes on financial and capital transactions account for roughly half the collection of property taxes in LA7 and are widely used, but they tend to distort investment/savings decisions. - Estate, inheritance, and gift taxes are seldom used in the region and collections are generally negligible; these taxes are likely less distortive because they tax unrealized capital gains at death and can help tackle wealth inequality. - Environmental taxes, such as carbon taxes, can be efficient instruments to reduce carbon emissions, provide revenue, and are difficult to avoid by the informal sector—thus potentially aiding formalization and enabling reductions in more distortive taxes (e.g., labor taxes). ### Policy recommendations and implementation considerations - Pursue VAT base-broadening by reducing reduced rates and exemptions while designing compensation mechanisms targeted to vulnerable households and considering middle-class concerns to reduce political resistance. - Combine formalization policies (electronic payments at compliant retailers) with transfers that incentivize purchases at VAT-compliant sellers. - Consider expanding reliance on less-distortive property and estate taxes and on carbon/environmental taxes to mobilize revenue in a growth-friendly and progressive manner. - Sequence tax reforms to reflect economic conditions and fiscal needs: - Timing should reflect state of the economy and fiscal needs; in the current juncture, supporting livelihoods and robust recovery are priorities. - Countries with tighter fiscal space may need early steps to secure tax revenue; as the pandemic recedes, reforms may have more promising timing. - Sequencing can avoid short-term revenue declines from reforms (for example, some CIT changes may temporarily lower revenue). - Sequencing allows development of administrative capacity needed to collect specific taxes (e.g., broader personal income tax base with fewer deductions). - Ensure reforms garner broad public support by improving the quality and composition of public expenditure, enhancing the fairness of fiscal policy, conducting proper communication, involving stakeholders, and strengthening institutional and administrative capacity of tax authorities. - Consider tax-neutral reallocations toward VAT as potentially growth-friendly; investment appears as the main channel through which tax policy affects growth in LAC, followed by employment growth (Box 1 results). ### Specific policy instruments discussed - Well-targeted transfers and redesign of transfer systems to encourage VAT compliance. - Electronic payment promotion, mindful of potential regressive impacts of some policies (e.g., reduced VAT rates tied to credit/debit card use). - Estate, inheritance, and gift tax revamps to capture unrealized capital gains at death and tackle wealth inequality, acknowledging valuation and administrative challenges. - Carbon taxes to address externalities and to support formalization by being hard-to-avoid by informal sectors. - Consideration of an Earned Income Tax Credit (EITC) or comparable refundable tax credit to incentivize labor force participation, offset high SSCs faced by low-income formal workers, and foster female formal employment; design attention should be paid to eligibility thresholds (individual vs. joint income) and interactions with PIT. *Source: IMF, World Economic Outlook database; OECD Tax Revenue Statistics database; and IMF staff calculations.* ### Box 2 (continued) ### Box 2 (continued) ### Existing dependent-based tax credits and subsidies in LA5 countries - No LA5 country currently has an EITC scheme. - Chile: Asignación Familiar supports low-income formal workers with dependents (children and some types of elders). - Colombia: Subsidio Familiar supports low-income formal workers with dependents (children and some types of elders). - Mexico: Subsidio al Empleo is an income support scheme for low-income workers with more granular brackets that resemble the phase-out component of the EITC. ### Comparison with the EITC - Objective alignment: - Chile’s, Colombia’s, and Mexico’s schemes share similar objectives with the EITC: encouraging formality and redistribution. - Design differences: - These national schemes differ in design from a conventional EITC. - Mexico’s Subsidio al Empleo has more granular brackets and resembles the EITC’s phase-out feature more closely than the Chilean and Colombian programs. *This box was prepared by Samuel Pienknagura and Carlo Pizzinelli.* ### Annex 2. Estimating Empirically the Effects from VAT, PIT and CIT on ### Annex 2. Estimating Empirically the Effects from VAT, PIT and CIT on Long-Term Growth ### General specification and identification - Empirical model (ARDL) for g_{i,t} (growth rate of annual real GDP per capita): - Includes contemporaneous and one-period lag of tax vector f_{i,t}′ and controls z_{i,j,t}. - ARDL structure with dependent and independent variables lagged by order 1 and a dummy c_t that equals one for years after 2008 (inclusive) and zero otherwise. - To address reverse causality from growth to taxes, impose δ_{0i} = 0 (disallow contemporaneous fiscal variables in Eq. (1)), then re-parameterize in error-correction form for estimation. - Tax reallocation specification (for revenue-neutral reallocation to VAT from income taxes): - Total tax level: t_tot_{i,t} = ratio of total tax revenue to GDP. - Tax component shares: c_{i,j,t} with ∑_{j=1}^{m} c_{i,j,t} = 1, so omit one component (income tax share) to avoid perfect multicollinearity. - With m = 3 (VAT c_{i,V,t}, income taxes c_{i,I,t}, other taxes c_{i,O,t}) and omitting c_{i,I,t}, the coefficient on c_{i,V,t} measures the growth effect of a revenue-neutral increase in VAT offset by income taxes (δ_{0i,V} − δ_{0i,I} in short-run parameterization; long-run counterpart is θ_{i,V}^S − θ_{i,I}^S). - Error-correction re-parameterization (Eq. (4)): - Short-run dynamics captured by first differences (Δ). - Error-correction speed of adjustment: φ_i = −(1 − λ_i), requiring φ_i < 0 (or λ_i < 1) to ensure convergence to the long-run equilibrium. - Long-run coefficient on the lagged VAT share is s_{i,V,t−1}: θ_{i,V}^S − θ_{i,I}^S, where θ_{i,V}^S = (δ_{0i,V}^S + δ_{1i,V}^S)/(1 − λ_i) and θ_{i,I}^S = (δ_{0i,I}^S + δ_{1i,I}^S)/(1 − λ_i). ### Key empirical findings (from re-estimated specifications) - LAC sample: - Revenue-neutral reallocations to the VAT offset by income taxes are positive and highly significant for LAC. - Within income taxes, the PIT appears to be more detrimental for growth than the CIT (significance of coefficients slightly weaker when disaggregated). - OECD sample: - Indication that the VAT is more growth friendly than income taxes, but result is driven by the CIT: - CIT coefficient is negative and highly significant, with a coefficient larger in absolute value. - PIT coefficient remains small in absolute value and non-significant (growth effect of PIT relative to VAT is not statistically different). - Interpretation: - A positive long-run coefficient on the VAT share (θ_{i,V}^S − θ_{i,I}^S > 0) implies a revenue-neutral increase in VAT offset by income taxes is associated with higher long-run growth. ### Dataset, sample and data sources - Novel dataset constructed combining: - OECD Tax Revenue Statistics Database (tax composition). - Macroeconomic and fiscal variables from WEO. - Sample inclusion criterion: - Only countries with at least 15 years of continuous non-missing tax and macro-fiscal variables are used. - Dataset coverage: - Includes information up to 2019. - LAC sample: 16 countries / 376 obs. - OECD sample: 33 countries / 1112 obs. - Note on country-year coverage (as summarized in Annex Table 2.1): years covered shown in parenthesis for each LAC and OECD country (Annex Table 2.1 in source). ### Descriptive statistics (variables and summary moments) - Sample identifiers: - LAC: 16 countries / 376 obs - OECD: 33 countries / 1112 obs - Variables (Mean, Std deviation, Min, Max) reported separately for LAC and OECD samples: - Growth rate of real GDP (PPP) per capita - LAC: Mean 0.02, Std deviation 0.03, Min -0.12, Max 0.10 - OECD: Mean 0.02, Std deviation 0.03, Min -0.14, Max 0.24 - Total taxes/GDP - LAC: Mean 0.21, Std deviation 0.06, Min 0.11, Max 0.34 - OECD: Mean 0.35, Std deviation 0.07, Min 0.13, Max 0.51 - Consumption taxes/Total taxes - LAC: Mean 0.50, Std deviation 0.10, Min 0.29, Max 0.83 - OECD: Mean 0.32, Std deviation 0.07, Min 0.14, Max 0.63 - Value added taxes/Total taxes - LAC: Mean 0.29, Std deviation 0.08, Min 0.04, Max 0.45 - OECD: Mean 0.19, Std deviation 0.05, Min 0.04, Max 0.32 - Personal income taxes/Total taxes - LAC: Mean 0.09, Std deviation 0.06, Min 0.00, Max 0.24 - OECD: Mean 0.25, Std deviation 0.10, Min 0.09, Max 0.56 - Corporate income taxes/Total taxes - LAC: Mean 0.14, Std deviation 0.05, Min 0.02, Max 0.32 - OECD: Mean 0.08, Std deviation 0.04, Min 0.01, Max 0.30 - Social security contribution/Total taxes - LAC: Mean 0.18, Std deviation 0.10, Min 0.00, Max 0.43 - OECD: Mean 0.27, Std deviation 0.12, Min 0.00, Max 0.48 - Property taxes/Total taxes - LAC: Mean 0.04, Std deviation 0.03, Min 0.00, Max 0.13 - OECD: Mean 0.05, Std deviation 0.03, Min 0.01, Max 0.34 - Other taxes/Total taxes - LAC: Mean 0.05, Std deviation 0.04, Min 0.00, Max 0.26 - OECD: Mean 0.01, Std deviation 0.02, Min 0.00, Max 0.19 - Investment/GDP - LAC: Mean 0.22, Std deviation 0.06, Min 0.10, Max 0.44 - OECD: Mean 0.24, Std deviation 0.05, Min 0.12, Max 0.45 - Employment growth - LAC: Mean 0.02, Std deviation 0.03, Min -0.06, Max 0.35 - OECD: Mean 0.01, Std deviation 0.02, Min -0.14, Max 0.11 - Government consumption/GDP - LAC: Mean 0.14, Std deviation 0.03, Min 0.05, Max 0.24 - OECD: Mean 0.19, Std deviation 0.04, Min 0.06, Max 0.28 ### Micro-simulations of effective labor taxation (LA7) — data and framework (summary) - Worker-level microdata used for nine-country LA7 exercise drawn from labor force or household surveys collected in 2019 or 2018 (2018 values adjusted to 2019 prices using CPI). - Countries and sources listed in the source (examples include Argentina: ENGHO 2018; Brazil: PNAD 2019; Chile: ENE-ESI December 2019; Colombia: GEIH June 2019; Mexico: ENIGH 2019; Peru: ENAHO 2018; Uruguay: ECH 2019). - Framework: - Methodology follows IMF (2017a). - Formal workers aged 18–65 with available data on labor earnings, pension and health contributions, number of children, marital status, spouse employment and income. - Use ILO definition of formality. - Assume reported income is net of taxes and SSCs; annualize monthly amounts by multiplying by 12. - Impute deductions, exemptions, and tax credits from country tax codes and EYGM 2019–2020 PIT scales to back out gross earnings consistent with reported net wages. - Country-specific adjustments: where worker-level SSC reporting exists (e.g., Colombia GEIH), reconcile responses to tax-code percentages; where unavailable, assume workers pay full mandatory SSCs per tax code; self-employed treated per tax-code rules. - When no automatic dependent deductions but tax credits exist for education expenses (e.g., Mexico and Chile), approximate likely expenditure per child using other sources (e.g., Chile: Encuesta de Presupuestos Familiar 2018 to derive average education expenditure per child as fraction of workers’ income). ### Policy-relevant implications (from empirical results) - Revenue-neutral tax composition shifts: - Shifting revenue toward VAT and away from income taxes is associated with higher long-run growth in LAC. - Within income taxes, PIT appears more growth-detrimental than CIT in LAC; in OECD, CIT is the primary driver of negative growth associations. - Empirical approach suggests policymakers should consider tax composition (not only total tax level) when designing growth-friendly revenue measures, recognizing: - Heterogeneity across country groups (LAC vs OECD). - Distinct growth impacts across income tax subcomponents (PIT vs CIT). - Short-run versus long-run effects captured by error-correction dynamics. *Source: Annex 2, "Estimating Empirically the Effects from VAT, PIT and CIT on Long-Term Growth" (chapter annex content).* ### 2008. Paris: OECD Publishing. ### ch2 - 2008. Paris: OECD Publishing. ### OECD publications (consumption taxes, taxation, digitalization) - Organization for Economic Co-operation and Development (OECD). 2015. International VAT/GST Guidelines. Paris: OECD Publishing. - Organization for Economic Co-operation and Development (OECD). 2017. International VAT/GST Guidelines. Paris: OECD Publishing. - Organization for Economic Co-operation and Development (OECD). 2020a. Consumption Tax Trends 2020, VAT/GST and Excise Rates, Trends and Policy Issues. Paris: OECD Publishing. - Organization for Economic Co-operation and Development (OECD). 2020b. Taxing Wages 2018-2019: Special Feature: How Tax Systems Influence Choice of Employment Form. Paris: OECD Publishing. - Organization for Economic Co-operation and Development (OECD). 2020c. Tax Challenges Arising from the Digitalization of the Economy: Economic Impact Assessment. Paris: OECD Publishing. ### Econometric and methodological references - Pesaran, M.H. and R.P. Smith. 1995. “Estimating Long-Run Relationships from Dynamic Heterogeneous Panels.” Journal of Econometrics, Vol. 68, No. 1, pp. 79-113. - Pesaran, M.H., Y. Shin, and R.P. Smith. 1999. “Pooled Mean Group Estimation of Dynamic Heterogeneous Panels.” Journal of the American Statistical Association, Vol. 94, No. 446, pp. 621-634. ### Tax policy, labor, and informality studies - Pessino, C., E. Pineda, A. Rasteletti, and V. Alarcon. 2021. “Now It Is the Time to Foster Labor Formalization in Latin America and the Caribbean.” IDB Blog Post. Retrieved from: https://blogs.iadb.org/gestion-fiscal/en/now-it-is-the-time-to -foster-labor-formalization-in-latin-america-and-the-caribbean/ - Saez, E. 2002. “Optimal Income Transfer Programs: Intensive versus Extensive Labor Supply Responses.” Quarterly Journal of Economics, Vol. 117, No. 3, pp. 1039-1073. - Tanzi, V. 2000. “Taxation in Latin America in the Last Decade.” Stanford King Center on Global Development Working Paper 76, Stanford, CA. - Tanzi, V. and H. Zee. 1997. “Fiscal Policy and Long-Run Growth.” IMF Staff Papers 44, pp. 179–209, Washington, DC. - World Bank (WB). 2021. The Long Shadow of Informality: Challenges and Policies. Washington, DC. ### E-commerce and COVID-19 impact - UNCTAD. 2021. Estimates of Global E-Commerce 2019 and Preliminary Assessment of COVID-19 Impact on Online Retail 2020. Geneva. *ch2 - 2008. Paris: OECD Publishing.* --- _Source: https://www.imf.org/-/media/files/publications/reo/whd/2021/english/ch2.pdf_