Tax dodging cost public treasuries in Latin America and the Caribbean an estimated US$340 billion in 2015, or 6.7 percent of the region's total income for the year, according to estimates from the Economic Commission for Latin America and the Caribbean.
In many countries in the region, tax policies reinforce high levels of income inequality with relatively regressive systems. Tax ineffectiveness is also worsened by the fact that the top economic elites in the region are notorious for not paying their fair share of taxes.
According to ECLAC, this makes tax evasion one of the “main weak spots in Latin American economies.” The regional commission estimates that in 2015, tax dodging expanded by 2.4 percent of GDP in the case of Value-Added Tax and 4.3 percent of GDP in the case of income tax, totalling 6.7 percent of GDP overall – or a whopping US$340 billion.
As a result of these challenges, ECLAC calls for revisions in national tax policies aimed at creating more progressive revenue collection and a redoubling of efforts to close tax loopholes and improve collections. These steps are necessary, according to the organization, in light of “high levels of informality, poverty and socioeconomic inequality, poor institutional quality, and taxpayers’ low degree of fiscal consciousness and education” in many countries in the region.
Illegal price manipulations–including price-fixing and price-gouging–on the international comodities market have also drained domestic resources to the tune of of 1.8 percent of regional GDP between 2004 to 2013. “The more a country is inserted into the global economy,” ECLAC explains, “the bigger the possible erosion of their tax base is.” This siphoning off of financial resources happens through manipulation of global trade prices, especially in trade between countries in the region and the United States.
The tax evasion numbers draw on data from ECLAC’s Economic Survey of Latin America and the Caribbean 2016, released in July, and echoes calls for countries to strengthen tax collection and address tax avoidance to increase resources to support public investment and wealth distribution.
The 2016 report found that Latin America’s economies are expected to shrink by 0.8 percent overall this year.
ECLAC’s statistics continue to shed light on the problem of tax dodging in the region after the leak of the Panama Papers earlier this year revealed that many of Latin America’s political and economic elite are involved in shady money-laundering schemes or hiding money in offshore tax havens. The cache of over 11.5 million documents dating back to the late 1970’s revealed how the Panama-based law firm Mossack Fonseca helped world leaders, wealthy elites, and celebrities hide assets in shell companies and offshore tax havens.
Most notably, Argentine President Mauricio Macri was one of the global heads of state directly implicated in the Panama Papers. Eduardo Cunha, the Brazilian lawmaker who spearheaded the impeachment campaign that ousted Dilma Rousseff as president last week, was also implicated for receiving bribes linked to offshore companies involved in the country’s Petrobras state oil scandal. Several other figures including Mexican and Honduran economic elite, Peruvian politicians, and others were also linked to potential tax evasion.
Despite shedding some light on the shadowy business of tax havens, the Panama Papers were limited in their scope because the names of many account holdeers were obscured by the complex and secretive nature of offshore schemes.
Earlier this year, ECLAC also published a report called Horizons 2030 which contends that increased social inclusion and efforts to combat climate change should be prioritized as central development strategies for the region to ensure increased equality and sustainability.