Tax Policy for Inclusive Growth in Latin America and the Caribbean

IMF Working Papers, January 21, 2022

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Study provides an overview of tax structures in LAC before the COVID-19 pandemic, compares them to OECD countries, and provides recommendations for growth-friendly and inclusive tax policy reforms.
LAC countries collect significantly lower tax revenue relative to OECD countries and have tax structures that rely excessively on corporate-income taxes (CIT) while personal-income taxes (PIT) remain largely underutilized.

LAC tax revenue is significantly lower than OECD counterparts (no numeric breakdown provided on the page).
Tax structures in LAC rely excessively on corporate-income taxes (CIT).
Personal-income taxes (PIT) are largely underutilized in LAC.
Design flaws in PIT limit revenue mobilization and progressivity.
Value-added taxes (VAT) suffer from exemptions and reduced rates that weaken revenue performance.
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 further tax base erosion.

Strengthen PIT to mobilize revenue and improve progressivity by addressing critical design flaws.
Mitigate possible adverse growth effects of PIT strengthening by providing incentives to labor force participation and formalization (example: earned-income tax credits).
Use the ongoing global corporate income tax reforms as an opportunity to reassess CIT in LAC:
- Align CIT statutory rates with those of other regions—when assessed to be relatively high—to attract investment and alleviate profit shifting.
- Broaden the corporate tax base.
Improve VAT performance by tackling exemptions and reduced rates.
Tax the digital economy similarly to other sectors to prevent further tax base erosion, acknowledging that additional revenue estimates from doing so appear modest.