## 1. Total Tax Revenue Collection (wpiea2022008-print-pdf)

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### Key statistics and cross-region comparison
- Tax collection by type, 2019 (Percent of GDP):
  - Value added taxes: LAC 6.3; OECD 7.2
  - Personal income taxes: LAC 2.3; OECD 8.8
  - Corporate income taxes: LAC 3.7; OECD 2.8
  - SSCs and payroll taxes: LAC 4.0; OECD 10.2
  - Other taxes: LAC 6.1; OECD 7.0
  - Total tax revenue: LAC 22.4; OECD 35.5
- OECD reliance on PIT: 8.8 percent of GDP in 2019 vs LAC 2.3 percent of GDP.
- SSCs lower on average in LAC, with Brazil, Uruguay and Argentina near OECD levels.
- Several LAC countries have VAT collection above the average OECD country.

### Development, income levels, and tax-structure patterns
- Dataset/sample:
  - Sample of 16 LAC (period 1992–2019) and 33 OECD countries (period 1972–2019).
  - New dataset covers taxes and macro-fiscal variables starting in 1972 for 33 OECD countries and in 1992 for 16 LAC countries, going through 2019.
- Empirical associations:
  - Real GDP (PPP) per capita (2017 prices) associated with higher tax revenues and more reliance on direct taxation.
  - Direct taxes and PIT importance rise with income levels.
- Distributional observations:
  - Several LAC countries collect less revenue and are more tilted toward indirect taxes than income levels predict.
  - LAC over-relies on the VAT (except Mexico) and CIT, and under-relies on the PIT (except Uruguay and Mexico).
- Constraints:
  - Higher informality and lower state capacity in LAC impede broad-based income tax collection.
  - Despite improvements during 2005–19, average PIT collection in LAC remains about one-quarter of the OECD average.

### Growth effects of consumption and income taxes (theory and historical trends)
- Theoretical considerations:
  - Consumption taxes can be more growth-friendly than income taxes, but design matters (uniform VAT with broad base may be growth-neutral; rate differentiation and exemptions can harm efficiency).
  - Income taxes can reduce after-tax returns to capital and labor, affecting investment and labor supply.
  - Tax design and enforcement capacity determine growth impacts; a well-designed/enforced CIT with equity allowance may outperform a poorly designed VAT.
  - Narrow bases from enforcement problems, exemptions, and incentives are common LAC design flaws reducing efficiency and encouraging rent-seeking.
- Historical trends (1999–2019):
  - CIT shares similar in 1999; by 2019 CIT gained prominence in LAC (commodity prices, statutory rates, base broadening), OECD CIT share stable despite statutory rate reductions.
  - VAT’s share slightly increased in both groups.
  - PIT share increased in LAC but remained stable in OECD, maintaining gaps.

### Empirical approach (objective, methodology, sample)
- Objective: estimate impact on growth of VAT, PIT, and CIT (together >50 percent of total tax collection in 2019).
- Methodology: pooled mean group (PMG) and mean group (MG) (Pesaran, Shin, Smith 1999; Pesaran and Smith 1995).
  - Allows short-run and long-run effects; focuses on revenue-neutral reallocations.
- Sample/data: annual observations up to 2019 for 16 LAC countries and 33 OECD countries.

### Econometric results: VAT versus income taxes (long-run PMG estimates)
- Main finding: VAT relatively growth-friendly in LAC; evidence less clear in OECD.
- LAC sample (Columns 1–3; Countries: 16; Observations: 376; Hausman p-value: 0.776 (Cols 1–2) and 0.869 (Col 3)):
  - Total taxes/GDP: 0.238*** (t-statistic 4.24) in Columns (1) and (2); 0.226*** (t-statistic 3.88) in Column (3).
  - Other taxes/Total taxes: -0.00950 (t-statistic -0.33) in Column (1); -0.199*** (t-statistic -5.64) in Column (2); -0.173*** (t-statistic -4.43) in Column (3).
  - Value added taxes/Total taxes: 0.189*** (t-statistic 4.69) in Column (1); 0.0259 (t-statistic 1.18) in Column (2).
  - Income taxes/Total taxes: -0.189*** (t-statistic -4.69) in Column (2); -0.0259 (t-statistic -1.18) in Column (1).
  - Personal income taxes/Total taxes: -0.230*** (t-statistic -3.68) in Column (3).
  - Corporate income taxes/Total taxes: -0.165*** (t-statistic -3.12) in Column (3).
  - Investment rate: 0.0218 (t-statistic 0.49) in Columns (1) and (2); 0.0239 (t-statistic 0.52) in Column (3).
  - Employment growth: 0.0534 (t-statistic 1.21) in Columns (1) and (2); 0.0305 (t-statistic 0.78) in Column (3).
  - Government consumption: -0.146** (t-statistic -2.45) in Columns (1) and (2); -0.114* (t-statistic -1.82) in Column (3).
  - EC coefficient (φ): -0.818*** (t-statistic -13.35) in Columns (1) and (2); -0.805*** (t-statistic -14.18) in Column (3).
  - after-GFC dummy: -0.00618** (t-statistic -2.04) in Columns (1) and (2); -0.00340 (t-statistic -1.00) in Column (3).
- OECD sample (Columns 4–6; Countries: 33; Observations: 1112; Hausman p-value: 0.855 (Cols 4–5) and 0.992 (Col 6)):
  - Total taxes/GDP: -0.108*** (t-statistic -5.28) in Columns (4) and (5); -0.102*** (t-statistic -4.82) in Column (6).
  - Other taxes/Total taxes: -0.0325* (t-statistic -1.88) in Column (4); -0.0583** (t-statistic -2.29) in Column (5); -0.0747*** (t-statistic -2.78) in Column (6).
  - Value added taxes/Total taxes: 0.0259 (t-statistic 1.18) in Column (5).
  - Personal income taxes/Total taxes: -0.0198 (t-statistic -0.88) in Column (6).
  - Corporate income taxes/Total taxes: -0.0593* (t-statistic -1.93) in Column (6).
  - Investment rate: 0.0272 (t-statistic 1.56) in Columns (4) and (5); 0.0141 (t-statistic 0.80) in Column (6).
  - Employment growth: 0.398*** (t-statistic 11.55) in Columns (4) and (5); 0.378*** (t-statistic 10.50) in Column (6).
  - Government consumption: -0.150*** (t-statistic -3.93) in Columns (4) and (5); -0.165*** (t-statistic -4.14) in Column (6).
  - EC coefficient (φ): -0.911*** (t-statistic -22.12) in Columns (4) and (5); -0.899*** (t-statistic -21.71) in Column (6).
  - after-GFC dummy: -0.0127*** (t-statistic -7.25) in Columns (4) and (5); -0.0121*** (t-statistic -7.06) in Column (6).

### Magnitude interpretation and robustness
- Magnitude example (LAC): a 1 ppt of total taxes reallocated from income taxes to the VAT could boost long-term growth by 0.189 ppt in the LAC sample.
  - Implication: average GDP per capita growth would go from about 2 percent to about 2.2 percent over the long run.
  - Fiscal magnitude: 1 ppt of total tax revenue collection in LAC ≈ about 0.21 percent of GDP collected with the VAT instead of income taxes.
- Robustness:
  - Results broadly unaffected by robustness checks (removal of contemporaneous effects, different sub-samples, elimination of certain controls).
  - Null that PIT and CIT coefficients are the same cannot be rejected in some specifications (Wald test).
  - Column-specific: VAT significant and positive in LAC (Column 1) but not in OECD (Column 4); Column 6 shows reallocations from the VAT to the PIT non-significant, whereas reallocations to the CIT have a negative and significant adverse effect on growth.

### Channels: investment, employment, and TFP
- Identification: regressions control for investment rate and employment growth; tax-neutral reallocations affect growth mainly through TFP residuals after factor accumulation.
- Figure 5 (LAC sample) findings:
  - Main transmission channel: investment; secondary: employment growth.
  - Ordering of growth-friendliness: VAT most growth-friendly, followed by CIT, then PIT.
  - Changes in investment are key channel through which taxes affect growth in LAC, followed by employment.

### The PIT in LAC: stylized facts and micro-simulation
- Revenue gap:
  - Average PIT revenue-to-GDP ratio in LAC: 2.3 percent.
  - OECD average PIT revenue-to-GDP ratio: 8.8 percent.
- Statutory rates and thresholds:
  - Statutory PIT rates in LAC lower than OECD; maximum-rate thresholds apply at higher relative income levels in LAC.
- Base erosion features:
  - LA7 tax codes include allowances, exemptions, deductions for mandatory SSCs and dependents that erode PIT base.
  - These provisions can reduce the fraction of workers’ gross income subject to PIT and lower effective rates; in several LA7 countries effective PIT rates can be reduced to zero for workers with relatively high income (relative to GDP per capita).
- Micro-simulation (2019, formal workers in LA7):
  - Method: apply country tax codes to reported net labor income and characteristics, including deductions/exemptions.
  - Key findings:
    - Only a very small share of formal workers pays the PIT in LA7 countries (except Mexico and Uruguay).
      - Argentina, Brazil, Chile, Peru: only 20 percent of formal workers are subject to PIT payments.
      - Colombia: only 4 percent of formal workers are subject to PIT payments.
    - Shares smaller when including informal workers.
    - Potential taxpayers concentrate in upper 20 percent of gross labor income distribution and face average effective rates well below statutory maxima.
  - Interpretation: significant scope to raise effective rates without affecting low- or even middle-income workers.

### Challenges to PIT mobilization: informality and labor tax wedges
- Informality:
  - Labor informality rates in 2019: Uruguay 24 percent; Peru 68 percent (ILOSTAT harmonized series).
  - Informal income more likely to avoid direct taxation, limiting PIT capacity.
- Labor tax wedges:
  - PIT increases may raise formal labor costs and erode the tax base.
  - SSCs (pensions, health, unemployment) collected via payroll taxes affect effective formal labor tax wedge.
- Policy implication:
  - Raising effective PIT rates and broadening base should consider equity and formality impacts; a more progressive PIT protecting low/middle incomes is feasible with complementary measures (incentives for formalization, focus on low-wage and female workers).

### Effective labor taxation and the formal labor tax wedge
- Methodology:
  - Effective labor taxes computed building on Mendoza, Razin and Tesar (1994).
  - Tax wedge computed for a single worker, without children, earning the mean formal wage, using the 2019 tax code; OECD tax wedge methodology with all mandatory SSCs included.
- Key findings:
  - Effective tax rate on formal employment is significantly higher once SSCs and informality corrections are included.
  - Adjusted for informality, effective tax rate on labor converged toward OECD level between 2005 and 2019; CAPDR surpassed OECD.
  - Using OECD tax wedge, SSCs in LA7 comparable or higher than OECD; low PIT incidence reduces formal labor costs relative to OECD.
- OECD tax wedge formula used: (PIT + SSCs paid by the employee + SSCs paid by the employer – cash benefits) / (employee’s gross labor earnings + SSCs paid by the employer).

### Policy instrument highlighted: Earned-Income Tax Credit (EITC)
- Rationale:
  - EITC conditions eligibility on working, phases in then out, and varies with family composition; examples: US EITC, UK working tax credit.
  - Functions as cash transfer for low-income households, offsets regressive SSCs, incentivizes labor participation and formalization; phase-in provides intensive-margin incentives and consumption insurance.
- Design and gender considerations:
  - EITC can foster female formal employment where gender gap is large.
  - Recommend eligibility thresholds based on individual income to avoid "marriage penalty".
  - Redistributive concerns from recipients with high-income spouses can be addressed via steeper PIT rate profile.
- Caveats:
  - Complex interactions with PIT make labor-supply impacts design-dependent; childcare and household duties matter for women’s tradeoffs.

### Options to simplify PIT and micro-simulation outcomes (LA5: Brazil, Chile, Colombia, Mexico, Peru)
- Reform scenarios (static micro-simulation; formal workers only; behavior held constant):
  - Scenario 1: statutory PIT rates apply to gross earnings without conventional deductions.
  - Scenario 2: Scenario 1 plus EITC for low-income earners based on US scheme normalized by each country’s mean income, with generosity increasing by number of children.
- Key quantitative outcomes (stripping deductions):
  - Revenue increases from eliminating deductions and adding EITC:
    - Mexico: 20 percent increase in nominal PIT revenues.
    - Brazil: around 50 percent.
    - Chile: around 50 percent.
    - Colombia: 100 percent.
    - Peru: a 4.5-fold increase.
  - EITC partially offsets revenue increases, notably in Chile and Colombia.
- Distributional effects:
  - Reforms increase PIT gap between average taxpayer and top 10 percent, making the system more progressive.
  - Gini and percentile-ratio measures indicate lower post-tax inequality: elimination of deductions lowers 90th/75th ratio while leaving 50th/25th ratio essentially unchanged; adding EITC lowers 50th/25th ratio by raising earnings in lower tail.
- Additional notes:
  - If formalization increased (not modeled), PIT revenues could fall (new formal workers are low-earning and EITC-eligible), but SSC revenues would rise.
  - Well-calibrated PIT simplification plus EITC could improve growth, equity, and tax administration.

### Taxation of non-labor income
- Observation:
  - Household surveys: non-labor income accounts for over 10 percent of total household income in top deciles in the average LAC country (Figure 11).
  - Likely understates true incidence due to misreporting and underrepresentation of top incomes.
- Policy implication:
  - Strengthening taxation of non-labor income could raise revenue without hurting progressivity or discouraging labor formalization; this would not affect the tax wedge and thus likely leave labor participation incentives unchanged.

### Corporate Income Tax (CIT) in LAC: collection, rates, incentives, and challenges
- Key statistics:
  - CIT yields around 3.7 percent of GDP in LA7/LAC as of 2019, almost 1 ppt of GDP above OECD in that year.
  - Average CIT statutory rate in LA7: 29.5 percent in 2019; Caribbean at low end: 20.1 percent in 2019.
- Patterns and concerns:
  - LA7 statutory CIT rates relatively stable and above other LAC and OECD levels.
  - 2005–19 CIT uptick in some LA7 due to commodity prices, statutory rate increases (Colombia), and base-broadening.
  - Widespread use of special regimes and generous incentives reduces effective CIT rates, eroding base and creating inefficiencies.
- CIT productivity:
  - CIT productivity (revenue % of GDP per percentage point of statutory rate) high in Chile and Uruguay; subdued in Argentina and Brazil despite high statutory rates, suggesting base erosion.
- Policy/design options:
  - Prefer rules-based, targeted incentives reducing cost of investment (accelerated depreciation, expensing) over discretionary tax holidays.
  - Full expensing could convert CIT into cash-flow tax that falls on rents and becomes more growth-friendly, but transition effects and short-run revenue losses must be considered.
  - Eliminating interest deductibility required for neutral cash-flow tax; harmonization across PIT/CIT and treatment of dividends, capital gains, interest needed for neutrality.
- International considerations:
  - Higher statutory rates encourage profit shifting; revenue loss from international tax avoidance greater in LA7 than other regions.
  - Profit shifting (transfer mispricing, debt shifting) undermines corporate base, especially where enforcement capacity limited.
  - Digital economy and intangible assets complicate territoriality-based corporate taxation; OECD/G20 BEPS Pillar 1 and 2 present reassessment opportunity.

### The VAT in LAC: collection, effective rates, and C-efficiency
- VAT as main revenue pillar.
- Collection and rates (2005–19 and 2019):
  - LA7 and OECD VAT collection broadly stable during 2005–19 at around 6.6 and 7.2 percent of GDP, respectively; other LAC countries increased VAT collection by about 1 ppts of GDP.
  - VAT statutory rates:
    - LA7 and OECD: around 19 percent.
    - Remaining LAC countries: average VAT standard rate 13.5 percent.
- VAT effective rates and gaps (2019):
  - LA7 VAT effective rate: 9 percent.
  - OECD VAT effective rate: 11.4 percent.
  - Remaining LAC countries VAT effective rate: 7.4 percent.
  - Regional averages (all LAC incl. LA7) in 2019: VAT statutory rate 15.5 percent; VAT effective rate 8.0 percent; C-efficiency 56.8 percent; policy and compliance gaps together 43.2 percent.
- Drivers of gaps:
  - Policy gap: reduced rates, zero-rates, exemptions for redistributive aims.
  - Compliance gap: evasion, especially among informal vendors in LA7.
- Reform implications:
  - Bringing C-efficiency closer to OECD could yield additional revenue without changing statutory rates by reducing policy and compliance gaps.
  - Broadening base and using revenue for targeted transfers could better meet equity objectives.
  - Stripping reduced rates and exemptions could improve allocation and growth; compensation mechanisms for vulnerable households needed.
- Digitalization and formalization:
  - Electronic payments at VAT-compliant sellers can broaden base and strengthen horizontal equity.
  - Formalization-based base-broadening should be combined with transfers that encourage purchases at compliant retailers.
  - Taxing the digital economy is critical to avoid further base erosion.

### Other taxes: property, estate, financial, and environmental taxes
- Property taxes:
  - Immovable property taxes account for roughly half of total property tax revenue.
  - Average immovable property taxes in 2019 for average LA7 country: 0.6 percent of GDP, 0.4 ppt below OECD average.
  - Exceptions close/above OECD: Chile, Colombia, Uruguay (Uruguay above OECD).
  - Large collection gaps in Mexico and Peru: about 0.7 ppt of GDP in 2019.
  - Property taxes typically local; updating cadasters has upfront costs but technology lowers costs (satellite imagery).
  - Alternative: residential property area- and location-based tax linked to benefits and services.
- Estate, inheritance, gift taxes:
  - Seldom used; collection negligible.
  - Can tax unrealized capital gains at death; implementation challenges and potential losses for family businesses in imperfect markets.
- Financial and capital transactions taxes:
  - Extensively used throughout LA7, accounting for roughly half the collection of property taxes in these countries; can be distorting.
- Environmental taxes:
  - Carbon taxes efficient to reduce emissions and provide revenue; hard to avoid by informal sector; could let governments reduce burdens of more distortive taxes and boost formalization and growth.

### Additional considerations for tax reform implementation
- Timing: reflect economic conditions and fiscal needs; post-pandemic priorities include supporting livelihoods and securing recovery.
- Sequencing: reforms may need sequencing due to lags before revenue materializes.
- Political economy and capacity: require broad public support, better public expenditure composition, communication, stakeholder participation, and strengthened tax administration.

### Annex II — Econometric specification, interpretation, and dataset
- General specification: ARDL structure with growth g_{i,t}, tax vector f_{i,t}′, controls z_{i,j,t}, contemporaneous and one-period lags, lagged dependent variable, crisis dummy equal to one for years after 2008 (inclusive).
- Revenue-neutral parameterization: t_tax_{i,t} = total tax/GDP; s_{i,j,t} = share of tax component j in total taxes; omission of one component yields coefficients interpretable as revenue-neutral reallocations.
- Error-correction reparameterization:
  - ∆g_{i,t} = φ_i ( g_{i,t−1} − θ_i T_tax_{i,t−1} − (θ_{i,V}^S − θ_{i,I}^S) s_{i,V,t−1} − (θ_{i,O}^S − θ_{i,I}^S) s_{i,O,t−1} − ∑_j θ_{i,j}^Z z_{i,j,t−1} ) + ... where φ_i = −(1 − λ_i) and φ_i < 0 for convergence.
  - Positive (θ_{i,V}^S − θ_{i,I}^S) implies revenue-neutral increase in VAT at expense of income taxes associated with higher long-run growth.
- Reverse causality addressed by imposing δ_{0i} = 0 (no contemporaneous fiscal effect) in sensitivity checks; LAC results robustly show reallocations to VAT positive and significant.
- Dataset: 16 LAC / 376 observations; 33 OECD / 1112 observations; data up to 2019; only countries with ≥15 years of continuous non-missing tax and macro-fiscal variables included.
- Annex Table II.1 descriptive statistics (selected means):
  - Growth rate of real GDP (PPP) per capita: Mean LAC 0.02; Mean OECD 0.02.
  - Total taxes/GDP: Mean LAC 0.21; Mean OECD 0.35.
  - Value added taxes/Total taxes: Mean LAC 0.29; Mean OECD 0.19.
  - Personal income taxes/Total taxes: Mean LAC 0.09; Mean OECD 0.25.
  - Corporate income taxes/Total taxes: Mean LAC 0.14; Mean OECD 0.08.
  - Social security contribution/Total taxes: Mean LAC 0.18; Mean OECD 0.27.
  - Investment/GDP: Mean LAC 0.22; Mean OECD 0.24.
  - Government consumption/GDP: Mean LAC 0.14; Mean OECD 0.19.

### Selected 2019 tax indicators and key statistics (from Annex)
- Tax and SSCs collection, 2019 (percent of GDP):
  - VAT: LA7 6.6; South America 6.7; CAPDR 5.3; Caribbean 7.1; LAC excl. LA7 6.2; LAC 6.3; OECD 7.2.
  - Personal income taxes: LA7 2.5; South America 1.8; CAPDR 1.6; Caribbean 3.4; LAC excl. LA7 2.2; LAC 2.3; OECD 8.8.
  - Corporate income taxes: LA7 3.6; South America 3.5; CAPDR 3.1; Caribbean 4.5; LAC excl. LA7 3.7; LAC 3.7; OECD 2.8.
  - SSCs and payroll taxes: LA7 4.4; South America 4.8; CAPDR 4.4; Caribbean 2.8; LAC excl. LA7 3.9; LAC 4.0; OECD 10.2.
  - Total tax and SSCs: LA7 23.5; South America 22.9; CAPDR 19.0; Caribbean 25.8; LAC excl. LA7 21.9; LAC 22.4; OECD 35.5.
- PIT design, 2019:
  - PIT rate min (percent): LA7 7.9; LAC 12.4; OECD 15.5.
  - PIT rate max (percent): LA7 33.9; LAC 27.8; OECD 43.1.
  - PIT threshold min (share of GDP per capita): LA7 0.7; LAC 1.8; OECD 0.6.
  - PIT threshold max (share of GDP per capita): LA7 15.4; LAC 8.5; OECD 4.2.
- Average effective labor tax rates, 2019:
  - Average effective PIT rate: LA7 5.8; LAC 5.0; OECD 14.9.
  - Average effective SSCs rate: LA7 8.5; LAC 7.9; OECD 15.9.
  - Total average effective labor taxes (unadjusted): LA7 14.3; LAC 12.8; OECD 30.8.
  - Total average effective labor taxes (adjusted for labor informality): LA7 26.5; LAC 31.6; OECD 30.8.
- CIT design and productivity, 2019:
  - CIT statutory rate (percent): LA7 29.5; LAC 25.0; OECD 23.2.
  - CIT productivity (percent of GDP): LA7 0.1; LAC 0.2; OECD 0.1.
- VAT design features, 2019:
  - VAT standard rate: LA7 18.9; LAC 15.5; OECD 19.4.
  - VAT effective rate: LA7 9.0; LAC 8.0; OECD 11.4.
  - C-efficiency: LA7 52.2; LAC 56.8; OECD 69.0.
  - Policy and compliance gaps: LA7 47.8; LAC 43.2; OECD 40.5.
- Property taxes, 2019 (percent of GDP) — selected values:
  - Recurrent taxes on property (total): ARG 2.6; BRA 1.5; CHL 1.1; COL 1.8; MEX 0.3; PER 0.4; URY 2.2; LA7 1.4; LAC 0.7; OECD 1.9.
  - Of which immovable property: ARG 0.4; BRA 0.7; CHL 0.8; COL 0.8; MEX 0.2; PER 0.3; URY 1.1; LA7 0.6; LAC 0.3; OECD 1.0.
  - Total property taxes (percent of GDP): ARG 2.6; BRA 1.5; CHL 1.1; COL 1.8; MEX 0.3; PER 0.4; URY 2.2; LA7 1.4; LAC 0.7; OECD 1.9.

*International Monetary Fund — excerpt from "1. Total Tax Revenue Collection" (wpiea2022008-print-pdf)*

### 1.  Total Tax Revenue Collection

### 1.  Total Tax Revenue Collection

### Key statistics and cross-region comparison
- Tax collection by type, 2019 (Percent of GDP):
  - Value added taxes: LAC 6.3; OECD 7.2
  - Personal income taxes: LAC 2.3; OECD 8.8
  - Corporate income taxes: LAC 3.7; OECD 2.8
  - SSCs and payroll taxes: LAC 4.0; OECD 10.2
  - Other taxes: LAC 6.1; OECD 7.0
  - Total tax revenue: LAC 22.4; OECD 35.5
- OECD shows a significant reliance on PIT collection (8.8 percent of GDP in 2019), compared to only 2.3 percent of GDP in LAC.
- SSCs are on average lower in LAC, yet countries like Brazil, Uruguay and Argentina hover around OECD levels.
- Several countries within LAC exhibit higher VAT collection levels than the average OECD country.

### Notes on data and definitions
- Sources: OECD Tax Revenue Statistics database; and IMF staff calculations.
- Total tax revenue includes SSCs. LAC = Latin America and the Caribbean; SSCs = social security contributions.
- OECD (members as of end-2019) average excludes Chile and Mexico.
- Cross-country comparisons of CIT and PIT should be assessed carefully due to differences in classification of taxable income (e.g., sole ownership taxed under CIT in some LAC countries vs PIT in some OECD countries; imputation systems in OECD).

### Observed patterns
- LAC exhibits a stronger reliance on the CIT relative to the OECD, while the OECD relies more on the PIT.
- LAC overall collects less total tax revenue and has a structure more tilted toward indirect taxation relative to the OECD average.
- Informality and lower state capacity in LAC are important constraints on broad-based collection of income taxes.

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### Development, income levels, and tax structure
- Dataset and sample:
  - Sample of 16 LAC (period 1992–2019) and 33 OECD countries (period 1972–2019).
  - New dataset covers taxes and macro-fiscal variables starting in 1972 for 33 OECD countries and in 1992 for 16 LAC countries, going through 2019.
- Empirical association:
  - 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.
  - Direct taxes become relatively more important as income levels rise, with the development process highly associated with more reliance on the PIT.
- Distributional observations:
  - Several LAC countries collect less revenue and have structures more tilted toward indirect taxes relative to what their income levels would predict.
  - Most of LAC’s collection bias is explained by an over-reliance on the VAT (except for Mexico) and CIT, and a significant under-reliance on the PIT (except for Uruguay and Mexico).
- Informality and state capacity:
  - Informality is notably higher in LAC relative to the OECD and hampers governments’ ability to increase income tax collection.
  - Despite decreases in informality and increases in administrative/enforcement capacity during 2005–19, average PIT collection in LAC remains about one-quarter of the average OECD country’s PIT collection.

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### Growth effects of consumption and income taxes
- Theoretical considerations:
  - Literature suggests consumption taxes tend to be more growth-friendly than income taxes, but outcomes depend on design:
    - VAT raised through a uniform rate and broad base may be growth-neutral or less harmful.
    - Rate differentiation and exemptions can introduce negative efficiency effects.
  - Income taxes can reduce after-tax returns to physical and human capital, potentially reducing investment and labor supply.
  - Tax design and enforcement capacity are critical determinants of the growth impact of taxes; a well-designed and enforced CIT with an allowance for corporate equity may outperform a poorly designed VAT.
  - Narrow tax bases from enforcement problems, exemptions, tax incentives, and reduced rates are design flaws common in LAC that reduce efficiency and can encourage rent-seeking.
- Historical trends:
  - Both LAC and OECD collected similar CIT shares in 1999.
  - From 1999 to 2019 the CIT acquired greater prominence in LAC (driven in part by higher commodity prices and, in some cases, higher statutory rates and/or base-broadening measures), while the OECD’s CIT share remained stable despite significant reductions in statutory rates.
  - The VAT’s share slightly increased in both LAC and OECD between 1999 and 2019.
  - The PIT share increased in LAC over that period but remained stable in the OECD, with persistent gaps between the two groups.

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### Empirical approach used in the paper
- Objective: Study the impact on growth of the VAT, the PIT, and the CIT (which combined represent more than half of total tax collection in LAC and OECD countries as of 2019).
- Methodology:
  - Uses pooled mean group (PMG) and mean group (MG) methodologies of Pesaran, Shin, and Smith (1999) and Pesaran and Smith (1995).
  - Methods allow some reallocations to have transitory short-run growth impacts and others to have permanent long-run effects.
  - Focus on revenue-neutral tax reallocations because the growth impact of an individual tax depends on simultaneous changes in other tax or spending instruments.
- Sample and data:
  - Annual observations up to 2019 for a sample of 16 LAC countries and 33 OECD countries.

---

*International Monetary Fund — excerpt from "1. Total Tax Revenue Collection" (wpiea2022008-print-pdf)*

### Annex II contains a detailed description of the econometric model and the data sources.

### wpiea2022008-print-pdf - Annex II contains a detailed description of the econometric model and the data sources.

### Econometric results: VAT versus income taxes (long-run PMG estimates)
- Main finding: Relative growth-friendliness of the VAT is confirmed for the LAC sample; evidence is less clear for the OECD sample.
- LAC sample (Columns 1–3):
  - Total taxes/GDP: 0.238*** (t-statistic 4.24) in Columns (1) and (2); 0.226*** (t-statistic 3.88) in Column (3).
  - Other taxes to ensure tax neutrality/Total taxes: -0.00950 (t-statistic -0.33) in Column (1); -0.199*** (t-statistic -5.64) in Column (2); -0.173*** (t-statistic -4.43) in Column (3).
  - Value added taxes/Total taxes: 0.189*** (t-statistic 4.69) in Column (1); 0.0259 (t-statistic 1.18) in Column (2).
  - Income taxes/Total taxes: -0.189*** (t-statistic -4.69) in Column (2); -0.0259 (t-statistic -1.18) in Column (1).
  - Personal income taxes/Total taxes: -0.230*** (t-statistic -3.68) in Column (3); -0.0198 (t-statistic -0.88) in the OECD counterpart.
  - Corporate income taxes/Total taxes: -0.165*** (t-statistic -3.12) in Column (3); -0.0593* (t-statistic -1.93) in the OECD counterpart.
  - Investment rate: 0.0218 (t-statistic 0.49) in Columns (1) and (2); 0.0239 (t-statistic 0.52) in Column (3).
  - Employment growth: 0.0534 (t-statistic 1.21) in Columns (1) and (2); 0.0305 (t-statistic 0.78) in Column (3).
  - Govt consumption: -0.146** (t-statistic -2.45) in Columns (1) and (2); -0.114* (t-statistic -1.82) in Column (3).
  - EC coefficient (φ): -0.818*** (t-statistic -13.35) in Columns (1) and (2); -0.805*** (t-statistic -14.18) in Column (3).
  - after-GFC dummy: -0.00618** (t-statistic -2.04) in Columns (1) and (2); -0.00340 (t-statistic -1.00) in Column (3).
  - Countries: 16; Observations: 376; Hausman, p-value: 0.776 (Columns 1–2) and 0.869 (Column 3).
- OECD sample (Columns 4–6):
  - Total taxes/GDP: -0.108*** (t-statistic -5.28) in Columns (4) and (5); -0.102*** (t-statistic -4.82) in Column (6).
  - Other taxes to ensure tax neutrality/Total taxes: -0.0325* (t-statistic -1.88) in Column (4); -0.0583** (t-statistic -2.29) in Column (5); -0.0747*** (t-statistic -2.78) in Column (6).
  - Value added taxes/Total taxes: 0.0259 (t-statistic 1.18) in Column (5).
  - Personal income taxes/Total taxes: -0.0198 (t-statistic -0.88) in Column (6).
  - Corporate income taxes/Total taxes: -0.0593* (t-statistic -1.93) in Column (6).
  - Investment rate: 0.0272 (t-statistic 1.56) in Columns (4) and (5); 0.0141 (t-statistic 0.80) in Column (6).
  - Employment growth: 0.398*** (t-statistic 11.55) in Columns (4) and (5); 0.378*** (t-statistic 10.50) in Column (6).
  - Govt consumption: -0.150*** (t-statistic -3.93) in Columns (4) and (5); -0.165*** (t-statistic -4.14) in Column (6).
  - EC coefficient (φ): -0.911*** (t-statistic -22.12) in Columns (4) and (5); -0.899*** (t-statistic -21.71) in Column (6).
  - after-GFC dummy: -0.0127*** (t-statistic -7.25) in Columns (4) and (5); -0.0121*** (t-statistic -7.06) in Column (6).
  - Countries: 33; Observations: 1112; Hausman, p-value: 0.855 (Columns 4–5) and 0.992 (Column 6).
- Statistical notes:
  - Estimation method: Pooled Mean Group (PMG).
  - t-statistics reported in parentheses; significance: *** p<0.01, ** p<0.05, * p<0.1.
  - The cross-country homogeneity assumption on long-run coefficients is not rejected by Hausman tests (high p-values).

### Magnitude interpretation and robustness
- Magnitude example (LAC): Results suggest that a 1 ppt of total taxes reallocated from income taxes to the VAT could boost long-term growth by 0.189 ppt over the long run in the LAC sample.
  - Implication: average GDP per capita growth would go from about 2 percent to about 2.2 percent over the long run.
  - Fiscal magnitude: 1 ppt of total tax revenue collection in LAC ≈ about 0.21 percent of GDP collected with the VAT instead of income taxes.
- Robustness:
  - Results remain broadly unaffected under robustness checks, including removal of contemporaneous effects between tax variables and growth, selection of different sub-samples, and elimination of certain control variables.
  - The null that PIT and CIT coefficients are the same cannot be rejected via a Wald test in some specifications.
  - Column-specific nuances:
    - VAT coefficient significant and positive in LAC (Column 1) but not significant in OECD (Column 4).
    - Column 6: reallocations from the VAT to the PIT are non-significant, whereas reallocations to the CIT have a negative and significant adverse effect on growth.

### Channels: investment, employment, and TFP
- Identification: Table 1 regressions control for investment rate and employment growth, implying tax-neutral reallocations affect growth mainly through total factor productivity (TFP) residuals after accounting for factor accumulation.
- Figure 5 findings (LAC sample):
  - Main transmission channel of tax policy to growth: investment; secondary channel: employment growth.
  - Baseline (Columns 1 and 3) represented by blue bars; dropping investment rate (red markers) or employment growth (orange markers) magnifies effects.
  - Ordering of growth-friendliness across specifications: VAT most growth-friendly, followed by CIT, then PIT.
  - Conclusion: changes in investment emerge as a key channel through which taxes affect growth in LAC, followed by employment growth.

### The PIT in LAC: overview and stylized facts
- Revenue gap:
  - Average PIT revenue-to-GDP ratio in LAC: 2.3 percent.
  - OECD average PIT revenue-to-GDP ratio: 8.8 percent.
- Statutory rates and thresholds:
  - Statutory PIT rates in LAC are lower than OECD; maximum-rate thresholds apply at higher relative income levels in LAC.
- Base erosion features:
  - LA7 countries’ tax codes commonly include allowances, exemptions, and deductions for mandatory SSCs and dependents that erode the PIT base.
  - These provisions often reduce the fraction of workers’ gross income subject to PIT and lower effective tax rates.
- Effect on effective liability:
  - In several LA7 countries, standard deductions, exemptions, and credits can lower effective PIT rates to zero even for workers with relatively high income (relative to GDP per capita).

### Micro-simulation of effective PIT in LA7 (2019 worker-level analysis)
- Data and method:
  - Microdata from household surveys for LA7 countries in 2019.
  - For each formal worker, country tax codes applied to self-reported net labor income and personal characteristics to impute effective PIT liabilities, including comparable deductions and exemptions (e.g., SSCs and dependents).
- Key findings:
  - Only a very small share of formal workers pays the PIT in LA7 countries (except Mexico and Uruguay).
    - In Argentina, Brazil, Chile, and Peru: only 20 percent of formal workers are subject to PIT payments.
    - In Colombia: only 4 percent of formal workers are subject to PIT payments.
  - Shares would be even smaller when calculated over total employment (including informal workers).
  - Potential taxpayers concentrate in the upper 20 percent of the gross labor income distribution and face average effective rates significantly below statutory maximum rates.
- Annex Figure III.1:
  - Simulated effective PIT rates vs statutory rates across the formal worker income distribution show deductions, credits, and allowances reduce effective PIT liability to zero across most of the distribution and lower liabilities among high-income formal workers.
  - Deductions mostly benefit high-income earners in LA7 countries.
- Interpretation:
  - Significant scope exists to raise effective rates without affecting low- or even middle-income workers in the region.

### Challenges to PIT revenue mobilization: informality and labor tax wedges
- Informality:
  - High labor informality rates in the region in 2019 range from 24 percent in Uruguay to 68 percent in Peru (ILOSTAT harmonized series).
  - Income from informal activities more likely avoids direct taxation, limiting PIT collection capacity.
- Labor tax wedges:
  - Higher PIT rates may increase the relative costs of labor formality, potentially eroding the tax base.
  - PIT is one component of labor-tax costs; social security contributions (SSCs) for pensions, health, and unemployment insurance—collected via payroll taxes on employees or employers—also affect the effective formal labor tax wedge.
- Policy implication:
  - Raising effective PIT rates and broadening the base should consider impacts on equity and labor market formality; designing a more progressive PIT that protects low- and middle-income workers appears feasible if accompanied by appropriate measures (e.g., incentives for formal labor force participation, particularly for low-wage and female workers).

*Source: IMF staff calculations and analysis as presented in the specified content unit.*

### 1.  Average Effective Labor Tax Rates  2.  Formal Labor Tax Wedge

### 1.  Average Effective Labor Tax Rates  2.  Formal Labor Tax Wedge

### Effective labor taxation and the formal labor tax wedge
- Sources and methodology:
  - Effective labor taxes computed building on Mendoza, Razin and Tesar (1994).
  - Tax wedge computed for a single worker, without children, earning the mean formal wage, using the 2019 tax code.
  - Staff estimates use OECD tax wedge methodology with the amendment that all mandatory SSCs are included regardless of whether they are collected into publicly or privately-run funds.
- Key findings:
  - The effective tax rate on formal employment is significantly higher once SSCs are included and corrections for labor informality are considered, highlighting a high relative burden on labor in the region’s tax structure.
  - Adjusting the incidence of PIT and SSCs for labor informality in LAC, the effective tax rate on labor has converged towards the OECD level between 2005 and 2019, and in the case of CAPDR it has surpassed it.
  - Using the OECD 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; only the low incidence of the PIT in LA7 reduces formal labor costs relative to the OECD.
- Measurement note:
  - OECD tax wedge formula (as described): (PIT + SSCs paid by the employee + SSCs paid by the employer – cash benefits) / (employee’s gross labor earnings + SSCs paid by the employer).
- Behavioral and distributional implications:
  - Any attempt to increase PIT revenues must internalize interactions with SSCs and how both components affect formality levels and labor supply.
  - Workers may perceive SSCs as a tax rather than a contribution to future income or services; informality is also affected by employment protection regulations such as hiring and firing costs.

### Policy instrument highlighted: Earned-Income Tax Credit (EITC)
- Rationale for EITC in LAC:
  - EITC schemes condition eligibility on working, vary credit amount with income (phase-in then phase-out), and vary amounts/thresholds with family composition; examples include the US EITC and the UK working tax credit.
  - EITC functions as a cash transfer for low-income households, offsetting regressive SSCs and incentivizing labor force participation and formalization.
  - The phase-in region provides incentives on the intensive margin (longer hours); EITC also provides consumption insurance during negative income shocks.
- Gender and design considerations:
  - EITC may foster female formal employment where the gender gap is larger than in the OECD.
  - Design recommendation: set eligibility thresholds based on individual income rather than joint household income to avoid a "marriage penalty" and better incentivize female employment.
  - Redistributive concerns from recipients with high-income spouses could be addressed through a steeper PIT rate profile.
- Implementation caveats:
  - Complex EITC structure and interactions with PIT make impacts on labor supply highly dependent on design and household characteristics.
  - EITC design should pay attention to tradeoffs faced by women (childcare, household duties).

### Options to simplify PIT and micro-simulation assessment
- Reform scenarios analyzed (static micro-simulation; formal workers only; behavior held constant):
  - Scenario 1: countries’ statutory PIT rates apply to formal workers’ gross earnings without conventional deductions.
  - Scenario 2: Scenario 1 plus addition of an EITC for low-income earners based on the US scheme (normalized by each country’s mean income), with generosity increasing with the number of dependent children.
- Rationale and limitations:
  - Scenarios are illustrative and extreme; some deductions may be justified on equity grounds.
  - Static approach does not model transitions from informal to formal sector; such transitions would affect PIT and SSC revenues differently.
- Key quantitative outcomes (LA5: Brazil, Chile, Colombia, Mexico, Peru):
  - Eliminating all deductions and adding an EITC substantially increases nominal PIT revenues while reducing inequality.
  - Stripping down the PIT system to statutory rates yields revenue increases ranging from:
    - 20 percent in Mexico
    - around 50 percent in Brazil and Chile
    - 100 percent in Colombia
    - a 4.5-fold increase in Peru
  - The EITC partially offsets revenue increases, particularly in Chile and Colombia.
  - Reform effects on distribution:
    - The reforms generally increase the gap in the PIT rate faced by the average taxpayer relative to the top 10 percent, making the system more progressive.
    - Gini coefficient and percentile-ratio measures point to lower disparities in post-tax income: elimination of deductions lowers the 90th/75th percentile ratio while leaving the 50th/25th ratio essentially unaffected; adding EITC lowers the 50th/25th ratio by raising earnings in the lower tail.
- Additional points:
  - If formalization increased (not modeled), PIT revenues could fall (new formal workers are low-earning and EITC-eligible), but SSC revenues would rise since SSCs are paid by all formal workers.
  - Well-calibrated PIT simplification plus EITC could yield positive effects on growth and equity and simplify tax administration and compliance.

### Taxation of non-labor income
- Empirical observation:
  - According to household surveys, 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 (Figure 11).
  - This likely understates true incidence due to misreporting and underrepresentation of top-income earners.
- Policy implication:
  - Strengthening taxation of non-labor income (e.g., expanding base) could raise revenue without hurting progressivity or discouraging labor formalization, and could improve redistribution since capital income is more prominent in high-income households.
  - Well-designed taxation of non-labor income would not affect the tax wedge and thus would likely leave labor force participation incentives unchanged.

### Corporate Income Tax (CIT) in LAC: collection, rates, and incentives
- Key statistics:
  - 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.
  - Average CIT statutory rate in LA7 stood at 29.5 percent in 2019; at the low end the Caribbean stood at 20.1 percent in 2019.
- Observed patterns and concerns:
  - Statutory CIT rates in LA7 have remained relatively stable and above levels in other LAC countries and the OECD over time.
  - Several LA7 countries experienced an uptick in average CIT revenue collection during 2005-19 due to higher commodity prices, increases in statutory rates (Colombia), and base-broadening efforts.
  - To lower effective CIT rates, many LAC countries rely on special tax regimes and generous tax incentives and benefits; these can erode the tax base, reduce revenue, and create inefficiencies.
- CIT productivity and cross-country variation:
  - CIT ‘productivity’ indicator (revenue collection in percent of GDP per percentage point of statutory rate) is significantly above the OECD in Chile and Uruguay.
  - CIT productivity is more subdued in Argentina and Brazil despite above-average statutory rates, suggesting significant erosion of the corporate tax base in these cases.
- Policy and design options:
  - Prefer rules-based and targeted incentives that directly reduce the cost of investment (e.g., accelerated depreciation, investment expensing) rather than discretionary tax holidays.
  - Allowing for full expensing could convert the CIT into a cash-flow tax that falls on rents and becomes more growth-friendly, though transition effects and short-run revenue losses must be carefully considered.
  - Eliminating interest deductibility would be required for a neutral cash-flow tax; neutrality of capital income taxation also calls for harmonization across PIT/CIT and treatment of dividends, capital gains, and interest.
- International considerations:
  - Higher statutory rates can encourage profit shifting and international tax avoidance; the extent of revenue loss from international tax avoidance is greater in LA7 than in other regions.
  - Profit shifting (transfer mispricing, debt shifting) undermines the corporate tax base, particularly where enforcement capacity is limited.

*Italic: Source — IMF staff calculations and underlying country household surveys, tax codes, OECD (2020b), OECD Tax Revenue Statistics database, and International Labour Organization (from wpiea2022008-print-pdf).*

### 1.  Revenue Collection 2.  Statutory Rates 3.  Statutory Rates and

### 1.  Revenue Collection 2.  Statutory Rates 3.  Statutory Rates and

### Corporate tax challenges and international initiatives
- Corporate tax territoriality taxes profits only in host/source countries, exacerbating incentives for companies to shift profits abroad (Langenmayr and Liu 2020).
- Digital economy and intangible assets make it more difficult to track the source of corporate profits, challenging territoriality-based corporate taxation and affecting higher-tax countries where source-based tangible capital and workforce are located.
- Erosion of the corporate tax base due to tax incentives and profit shifting is widespread beyond LAC, motivating a global revisit of corporate tax laws.
- OECD/G20 BEPS Pillar 1 and 2 initiatives present an opportunity to reassess CIT design in the region with country-specific implications owing to diverse economic and corporate tax structures (see IMF 2021d referenced in source).

### The VAT in LAC: collection, statutory vs. effective rates, and C-efficiency
- VAT is the main tax revenue pillar in the region.
- LA7 and OECD VAT collection was broadly stable during 2005-19 at around 6.6 and 7.2 percent of GDP, respectively; other LAC countries increased VAT collection during the period by about 1 ppts of GDP due to higher statutory rates and base broadening measures.
- VAT statutory rates:
  - LA7 and the OECD: around 19 percent.
  - Remaining LAC countries: average VAT standard rate 13.5 percent.
- VAT effective rates and gaps:
  - LA7 VAT effective rate: 9 percent.
  - OECD VAT effective rate: 11.4 percent.
  - Remaining LAC countries VAT effective rate: 7.4 percent.
  - Regional averages (all LAC incl. LA7) in 2019: VAT statutory rate 15.5 percent; VAT effective rate 8.0 percent; C-efficiency 56.8 percent; policy and compliance gaps together 43.2 percent.
- Drivers of gaps:
  - Policy gap: reduced rates, zero-rate goods and exemptions intended for redistributive purposes (common in OECD).
  - Compliance gap: significant evasion, especially among ‘hard-to-tax’ informal vendors in LA7.
- Implications and reform opportunities:
  - Bringing C-efficiency closer to OECD averages could yield additional revenue without modifying statutory rates by reducing the policy and compliance gaps.
  - Low C-efficiency often reflects equity-motivated VAT design (reduced rates and exemptions); evidence suggests the richest households benefit most from these tax expenditures in absolute terms (IDB 2013).
  - Equity objectives could be better met by broadening the base—leaving a small number of basic products at a reduced rate—and using additional revenue for well-targeted transfers (IMF 2020a).
  - Increasing C-efficiency by stripping down reduced rates and exemptions could improve resource allocation and foster growth (Acosta-Ormaechea and Morozumi 2021).
  - Compensation mechanisms are needed for vulnerable households; existing mechanisms in the region sometimes leave middle-class households uncompensated, creating political economy obstacles.
- Digitalization and formalization:
  - Electronic payment methods at VAT-compliant sellers can increase the share of formal transactions, broadening the VAT base while strengthening horizontal equity.
  - Informal transactions often involve a relatively larger fraction of poorer households; thus, base-broadening through formalization should be combined with compensating well-targeted transfers redesigned to encourage purchases at compliant retailers (example: Uruguay social card program; Fenochietto and Benítez, 2021).
  - Digitalization expands information and communication sectors and e-commerce; taxing the digital economy is critical to avoid further tax base erosion even if estimated additional revenue appears modest (see IMF 2021d referenced).

### Other tax revenue sources: immovable property, estate, and environmental taxes
- Rationale for focusing on property and environmental taxes:
  - Address wealth inequality and climate change.
  - Improve growth-friendliness and progressivity of tax systems.
  - Reduce reliance on more distortive taxes (payroll taxes, SSCs, CIT).
- Property taxes:
  - Immovable property taxes account for roughly half of total property tax revenue.
  - Average immovable property taxes in 2019 for the average LA7 country: 0.6 percent of GDP, 0.4 ppt below the OECD average.
  - Notable exceptions with collection close to or above OECD: Chile, Colombia, Uruguay (Uruguay above OECD).
  - Large collection gaps in Mexico and Peru: about 0.7 ppt of GDP in 2019.
  - Immovable property taxes are generally collected at the local/municipal level, requiring coordination between central and subnational authorities.
  - Upfront costs to update cadasters and value properties exist, though costs have decreased due to technological innovations (e.g., satellite imagery).
  - Alternative design: residential property area- and location-based tax on occupancy linked to the cost of benefits and basic services (Ahmad 2018, 2021).
- Estate, inheritance, and gift taxes:
  - Seldom used in the region; collection generally negligible.
  - Estate taxes can tax unrealized capital gains at death, helping tackle wealth inequality (Batchelder and Kamin 2019 report nearly 40 percent of top 1 percent wealth in US is accrued but unrealized gains).
  - Implementation challenges: tax base determination, valuation criteria for illiquid/non-public assets, administration; potential large losses for owners of family businesses in imperfect capital markets (ECLAC 2021 referenced).
- Financial and capital transactions taxes:
  - Extensively used throughout LA7, accounting for roughly half the collection of property taxes in these countries.
  - These taxes can be distortive to investment/savings decisions.
- Environmental taxes (e.g., carbon taxes):
  - Carbon taxes are efficient to reduce carbon emissions and provide additional revenue.
  - Carbon taxes are difficult to avoid by the informal sector and could allow governments to reduce burdens of more distortive taxes, thereby boosting formalization and growth (Bento, Jacobsen and Liu 2018; IMF 2019b, 2020b, 2021e referenced).

### Additional considerations for tax reform implementation
- Timing:
  - Implementation timing should reflect economic conditions and fiscal needs.
  - In the current juncture (post-pandemic), supporting livelihoods and securing recovery are priorities (IMF 2021a referenced).
  - Countries with tighter fiscal space may need early steps to secure revenue to boost confidence in medium-term fiscal frameworks (David, Guajardo and Yepez 2019 referenced).
- Sequencing:
  - Reforms may need to be sequenced because changes in tax design elements may have lags before yielding revenue.
- Political economy and capacity:
  - Reforms need broad public support; post-pandemic preferences are shifting toward greater social policies and stronger safety nets.
  - Reforms should be accompanied by improvements in quality and composition of public expenditure and fairness of fiscal policy.
  - Proper communication, stakeholder participation, and strengthened tax administration capacity are required for success and sustainability.

### Annex: Selected tax indicators and key statistics (2019 unless otherwise indicated)
- Tax and SSCs collection, 2019 (percent of GDP) — selected entries:
  - VAT: LA7 6.6; South America 6.7; CAPDR 5.3; Caribbean 7.1; LAC excl. LA7 6.2; LAC 6.3; OECD 7.2.
  - Personal income taxes: LA7 2.5; South America 1.8; CAPDR 1.6; Caribbean 3.4; LAC excl. LA7 2.2; LAC 2.3; OECD 8.8.
  - Corporate income taxes: LA7 3.6; South America 3.5; CAPDR 3.1; Caribbean 4.5; LAC excl. LA7 3.7; LAC 3.7; OECD 2.8.
  - SSCs and payroll taxes: LA7 4.4; South America 4.8; CAPDR 4.4; Caribbean 2.8; LAC excl. LA7 3.9; LAC 4.0; OECD 10.2.
  - Total tax and SSCs: LA7 23.5; South America 22.9; CAPDR 19.0; Caribbean 25.8; LAC excl. LA7 21.9; LAC 22.4; OECD 35.5.
- PIT design features, 2019:
  - PIT rate min (percent): LA7 7.9; South America 9.3; CAPDR 12.1; Caribbean 18.7; LAC excl. LA7 14.5; LAC 12.4; OECD 15.5.
  - PIT rate max (percent): LA7 33.9; South America 28.2; CAPDR 22.4; Caribbean 32.4; LAC excl. LA7 32.5; LAC 27.8; OECD 43.1.
  - PIT threshold min (share of GDP per capita): LA7 0.7; South America 1.1; CAPDR 2.3; Caribbean 2.4; LAC excl. LA7 2.4; LAC 1.8; OECD 0.6.
  - PIT threshold max (share of GDP per capita): LA7 15.4; South America 13.8; CAPDR 5.4; Caribbean 4.1; LAC excl. LA7 5.0; LAC 8.5; OECD 4.2.
- Average effective labor tax rates, 2019:
  - Average effective PIT rate: LA7 5.8; South America 4.6; CAPDR 4.4; Caribbean 6.1; LAC excl. LA7 4.6; LAC 5.0; OECD 14.9.
  - Average effective SSCs rate: LA7 8.5; South America 7.5; CAPDR 7.5; Caribbean 9.2; LAC excl. LA7 7.6; LAC 7.9; OECD 15.9.
  - Total average effective labor taxes (unadjusted): LA7 14.3; South America 12.1; CAPDR 11.9; Caribbean 15.3; LAC excl. LA7 12.2; LAC 12.8; OECD 30.8.
  - Total average effective labor taxes (adjusted for labor informality): LA7 26.5; South America 32.2; CAPDR 40.3; Caribbean 19.3; LAC excl. LA7 34.0; LAC 31.6; OECD 30.8.
- CIT design features, 2019:
  - CIT statutory rate (percent): LA7 29.5; South America 26.3; CAPDR 27.4; Caribbean 20.1; LAC excl. LA7 23.1; LAC 25.0; OECD 23.2.
  - CIT productivity (percent of GDP): LA7 0.1; South America 0.1; CAPDR 0.1; Caribbean 0.2; LAC excl. LA7 0.2; LAC 0.2; OECD 0.1.
- VAT design features, 2019 (percent):
  - VAT standard rate: LA7 18.9; South America 17.4; CAPDR 13.3; Caribbean 15.5; LAC excl. LA7 13.5; LAC 15.5; OECD 19.4.
  - VAT effective rate: LA7 9.0; South America 9.2; CAPDR 6.4; Caribbean 9.5; LAC excl. LA7 7.4; LAC 8.0; OECD 11.4.
  - C-efficiency: LA7 52.2; South America 60.1; CAPDR 52.4; Caribbean 65.7; LAC excl. LA7 59.5; LAC 56.8; OECD 69.0.
  - Policy and compliance gaps: LA7 47.8; South America 39.9; CAPDR 47.6; Caribbean 34.3; LAC excl. LA7 40.5; LAC 43.2; OECD 40.5.
- Property tax revenue, 2019 (percent of GDP) — selected country and group values:
  - Recurrent taxes on property (total): ARG 2.6; BRA 1.5; CHL 1.1; COL 1.8; MEX 0.3; PER 0.4; URY 2.2; LA7 1.4; LAC 0.7; OECD 1.9.
  - Of which immovable property: ARG 0.4; BRA 0.7; CHL 0.8; COL 0.8; MEX 0.2; PER 0.3; URY 1.1; LA7 0.6; LAC 0.3; OECD 1.0.
  - Of which net wealth: ARG 0.2; BRA 0.0; CHL 0.0; COL 0.1; MEX 0.0; PER 0.0; URY 1.0; LA7 0.2; LAC 0.0; OECD 0.2.
  - Of which estate, inheritance and gift taxes: ARG 0.0; BRA 0.1; CHL 0.0; COL 0.0; MEX 0.0; PER 0.0; URY 0.0; LA7 0.0; LAC 0.0; OECD 0.1.
  - Of which financial and capital transactions: ARG 2.1; BRA 0.7; CHL 0.3; COL 0.8; MEX 0.1; PER 0.1; URY 0.1; LA7 0.6; LAC 0.3; OECD 0.4.
  - Non recurrent taxes on property: all listed values 0.0.
  - Total property taxes (percent of GDP): ARG 2.6; BRA 1.5; CHL 1.1; COL 1.8; MEX 0.3; PER 0.4; URY 2.2; LA7 1.4; LAC 0.7; OECD 1.9.

*International Monetary Fund: material extracted from the specified chapter/section of the source PDF.*

### ANNEX II. ESTIMATING EMPIRICALLY THE EFFECTS FROM

### ANNEX II. ESTIMATING EMPIRICALLY THE EFFECTS FROM VAT, PIT AND CIT ON LONG-TERM GROWTH

### General specification
- Empirical model (ARDL structure) for country i in year t:
  - g_{i,t} is the growth rate of annual real GDP per capita.
  - f_{i,t}′ is a vector of tax variables; z_{i,j,t} contains control variables (including investment rates and employment growth).
  - The model includes contemporaneous and one-period lagged independent variables and a lagged dependent variable.
  - A crisis dummy c_risis_t equals one for years after 2008 (inclusive) and zero otherwise.
- For a revenue-neutral reallocation from income taxes to the VAT, tax variables are parameterized using:
  - t_tax_{i,t} = ratio of total tax revenue to GDP.
  - s_{i,j,t} = share of tax component j in total tax revenue, with ∑_{j=1}^m s_{i,j,t} = 1 and one component omitted to avoid perfect multicollinearity.
  - Example with m=3 (VAT s_{i,V,t}, income taxes s_{i,I,t}, other taxes s_{i,O,t}): omitting the income tax share yields a VAT-share coefficient that measures the growth effect of a revenue-neutral increase in VAT offset by income taxes (δ_{0i,V}^S − δ_{0i,I}^S).

### Error-correction reparameterization and interpretation
- Re-parameterized estimating equation (error-correction form):
  - ∆g_{i,t} = φ_i ( g_{i,t−1} − θ_i T_tax_{i,t−1} − (θ_{i,V}^S − θ_{i,I}^S) s_{i,V,t−1} − (θ_{i,O}^S − θ_{i,I}^S) s_{i,O,t−1} − ∑_j θ_{i,j}^Z z_{i,j,t−1} ) 
    + δ_{0i} T_tax ∆t_tax_{i,t} + (δ_{0i,V}^S − δ_{0i,I}^S) Δs_{i,V,t} + (δ_{0i,O}^S − δ_{0i,I}^S) Δs_{i,O,t} + ∑_j δ_{0i,j} Δz_{i,j,t} + ζ_i crisis_t + δ_{0i,I}^S + δ_{1i,I}^S + ε_{i,t}.
  - φ_i = −(1 − λ_i) represents the error-correction speed of adjustment, requiring φ_i < 0 (or λ_i < 1) to ensure convergence to the long-run equilibrium.
  - Long-run VAT-share coefficient expressed as (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).
  - A positive (θ_{i,V}^S − θ_{i,I}^S) implies that a revenue-neutral increase in VAT revenue offset by income taxes is associated with higher long-run growth.
  - First-difference terms (Δ) capture short-run dynamics toward the long-run equilibrium.

### Addressing reverse causality and empirical results
- To limit reverse causality from growth to taxes, the contemporaneous relation between fiscal variables and growth is disallowed by imposing δ_{0i} = 0 in Eq. (1) before re-parameterizing to the error-correction form.
- Empirical findings when re-estimating under this restriction:
  - LAC sample:
    - Revenue-neutral reallocations to the VAT offset by income taxes are positive and highly significant.
    - Within income taxes, the PIT appears more detrimental for growth than the CIT (significance of coefficients is slightly weaker in this distinction).
  - OECD sample:
    - Indication that the VAT is more growth friendly than income taxes, but this result is driven by the CIT:
      - CIT coefficient is negative and highly significant, with a coefficient larger in absolute value.
      - PIT coefficient is small in absolute value and non-significant, implying its growth effect relative to the VAT is not statistically different.

### Dataset: data sources and descriptive statistics
- Dataset:
  - Novel dataset covering 16 LAC and 33 OECD countries built from the OECD Tax Revenue Statistics Database combined with macro-fiscal variables from WEO.
  - Only countries with at least 15 years of continuous non-missing tax and macro-fiscal variables are used.
  - Dataset includes information up to 2019; starting year and number of observations vary by country.
  - LAC: 16 countries / 376 obs.
  - OECD: 33 countries / 1112 obs.
- Annex Table II.1 — Descriptive statistics (LAC sample column then OECD sample column)
  - Growth rate of real GDP (PPP) per capita
    - Mean: 0.02 ; Mean: 0.02
    - Std deviation: 0.03 ; Std deviation: 0.03
    - Min: -0.12 ; Min: -0.14
    - Max: 0.10 ; Max: 0.24
  - Total taxes/GDP
    - Mean: 0.21 ; Mean: 0.35
    - Std deviation: 0.06 ; Std deviation: 0.07
    - Min: 0.11 ; Min: 0.13
    - Max: 0.34 ; Max: 0.51
  - Consumption taxes/Total taxes
    - Mean: 0.50 ; Mean: 0.32
    - Std deviation: 0.10 ; Std deviation: 0.07
    - Min: 0.29 ; Min: 0.14
    - Max: 0.83 ; Max: 0.63
  - Value added taxes/Total taxes
    - Mean: 0.29 ; Mean: 0.19
    - Std deviation: 0.08 ; Std deviation: 0.05
    - Min: 0.04 ; Min: 0.04
    - Max: 0.45 ; Max: 0.32
  - Personal income taxes/Total taxes
    - Mean: 0.09 ; Mean: 0.25
    - Std deviation: 0.06 ; Std deviation: 0.10
    - Min: 0.00 ; Min: 0.09
    - Max: 0.24 ; Max: 0.56
  - Corporate income taxes/Total taxes
    - Mean: 0.14 ; Mean: 0.08
    - Std deviation: 0.05 ; Std deviation: 0.04
    - Min: 0.02 ; Min: 0.01
    - Max: 0.32 ; Max: 0.30
  - Social security contribution/Total taxes
    - Mean: 0.18 ; Mean: 0.27
    - Std deviation: 0.10 ; Std deviation: 0.12
    - Min: 0.00 ; Min: 0.00
    - Max: 0.43 ; Max: 0.48
  - Property taxes/Total taxes
    - Mean: 0.04 ; Mean: 0.05
    - Std deviation: 0.03 ; Std deviation: 0.03
    - Min: 0.00 ; Min: 0.01
    - Max: 0.13 ; Max: 0.34
  - Other taxes/Total taxes
    - Mean: 0.05 ; Mean: 0.01
    - Std deviation: 0.04 ; Std deviation: 0.02
    - Min: 0.00 ; Min: 0.00
    - Max: 0.26 ; Max: 0.19
  - Investment/GDP
    - Mean: 0.22 ; Mean: 0.24
    - Std deviation: 0.06 ; Std deviation: 0.05
    - Min: 0.10 ; Min: 0.12
    - Max: 0.44 ; Max: 0.45
  - Employment growth
    - Mean: 0.02 ; Mean: 0.01
    - Std deviation: 0.03 ; Std deviation: 0.02
    - Min: -0.06 ; Min: -0.14
    - Max: 0.35 ; Max: 0.11
  - Government consumption/GDP
    - Mean: 0.14 ; Mean: 0.19
    - Std deviation: 0.03 ; Std deviation: 0.04
    - Min: 0.05 ; Min: 0.06
    - Max: 0.24 ; Max: 0.28

*Source: IMF staff calculations using IMF, World Economic Outlook database; OECD Tax Revenue Statistics database.*

### 3452274. https://dx.doi.org/10.2139/ssrn.3452274.

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*Source: wpiea2022008-print-pdf - 3452274. https://dx.doi.org/10.2139/ssrn.3452274.*

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