This paper reviews the Latin American experience with tax reform during the 1980s. It also discusses selected tax reform issues likely to be in the forefront of Latin American debate and discussion during the 1990s.
Fundamental tax reform can take many years to be fully implemented, and it effectively constitutes an aggregation of many annual discretionary changes. On the whole, tax reform in the 1980s de-emphasized steeply progressive rate structures of income and property taxes that were conceptually optimal from the point of view of equity and stabilization objectives but were difficult to administer. It emphasized, instead, broadly based, low-rate taxes on domestic consumption, such as the value-added tax (VAT), for their administrative ease based on a self-monitoring feature, as well as for their ability to raise revenue (as seen in terms of their ratios to GDP).
Between 1980 and 1991, the number of countries that operated a VAT increased to 15 from 8; they usually supplemented the VAT with a list of excisable items. The top marginal personal income tax rate in these countries fell from 48 percent on average to 35 percent. The average exemption level increased from about half of per capita GDP to one and a half times per capita GDP. The average corporate income tax rate fell to 36 percent from 44 percent, even though many countries continue to maintain progressive rate structures. The top marginal personal income tax rate approached the corporate income tax rate. Withholding taxes on foreign companies fell, on average, to 11 percent from 17 percent.
The tax-to-GDP ratio across countries has increased by 1 percentage point, on average, since the 1980s. However, tax reform is not always carried out with a revenue objective nor does it necessarily push a country to a significantly higher tax-to-GDP ratio. Similarly, a country with a high tax burden does not always represent one that has undertaken fundamental tax reform. Nevertheless, countries that have undertaken tax reform have, in general, experienced a greater revenue gain in terms of GDP than the overall sample of countries. Consumption tax revenue has increased in terms of GDP in reforming countries, while income and social security taxes have remained stagnant. Reliance on international trade taxes has declined slightly—with wide variations across countries—while property tax revenue has remained insignificant.
Latin America has pioneered many ideas in tax reform over the past decades and is likely to introduce and debate new ideas during the 1990s. These are likely to include a minimum income tax; alternative forms of corporate taxation, such as a cash flow tax or an assets tax; ways of capturing bases that are difficult to tax, such as financial intermediation and property; environmentally oriented taxes; the extension of withholding as a taxing mechanism; and tax harmonization across countries.