MEXICO CITY Latin American countries do not tax the rich enough, offer too many tax breaks and fail to punish rampant tax evasion, meaning they are unable to raise enough revenue to properly combat poverty and boost development, the Inter-American Development Bank said in a new study.
Personal income tax regimes in the region are little more than an "empty shell," the research found, and account for the bulk of a massive tax gap between Latin America and the developed world, crimping spending on social programs.
High tax thresholds, generous treatment of capital gains, a laundry list of deductions for items ranging from medical care to year-end bonuses and very low effective tax rates combine to cap revenue from personal income tax at an average 1.4 percent of gross domestic product, compared to 8.4 percent in developed countries.
High evasion rates on personal and corporate taxes as well as a narrow tax base also limit tax collection. Only one in 10 Latin Americans are registered taxpayers, compared with six in 10 in developed countries, and of those, less than 3 percent are subject to general audits each year.
"Half the potential collection of individual and corporate income tax is lost through evasion," the IADB said in the book "More than Revenue: Taxation as a Development Tool", to be released on Wednesday. "The main reason is that the probability of being punished for tax evasion is virtually nil."
The study also found that although the richest 10 percent of taxpayers generate 80 percent of total revenue, they pay an average effective tax rate of just 3.8 percent, partly due to the countries' generous treatment of investment income and tax breaks which amount to 50 percent of personal tax receipts.
Latin America is home to 99 billionaires, according to Forbes magazine, including Mexican telecommunications tycoon Carlos Slim, who tops the publication's annual rich list.
Overall, taxes collected in Latin America were worth a paltry 23.4 percent of GDP, while developed countries net taxes equivalent to 34.8 percent of GDP.
The IADB said urgently needed reforms should focus on shielding the poor, simplifying tax regimes and broadening the tax base. The development bank also noted that Latin America made little use of the environmental taxes common in Europe.
Gasoline taxes and congestion charges could raise extra revenue for improvements in public transport, the IADB said.