Together with our colleagues at leading civil society organizations around Latin America, the International Budget Partnership (IBP) has worked on a regional initiative focusing on the impact of tax expenditures on inequality in the continent (Latin America Tax Expenditure Research, Analysis and Learning Project, LATERAL). Today, in the face of the global COVID-19 pandemic, we launch a joint statement asking all Governments and Parliaments across the region to make all existing tax expenditures transparent, to review and eliminate those that provide unjustified and inequitable tax privileges and to redistribute the tax burden onto the wealthiest sectors of the population and those who can afford to pay more.
The public policy measures that are necessary for addressing the COVID-19 crisis pose significant funding challenges in the short, medium and long term. Governments’ limited fiscal capacity is worsened by the indiscriminate concession of tax privileges to individuals and companies. In Latin American countries, tax expenditures as a whole reduce government revenues by between 10 and 20 percent, and this is done without any proper evaluation of their impacts.
Latin America is one of the most unequal regions in the world, a situation that has worsened as a result of the COVID-19 pandemic. The region is currently the epicenter of the disease which, according to ECLAC (2020) estimates, could result in 16 million people falling below the poverty line this year.
Latin American tax systems tend to be regressive, and even so all of them provide many privileges in the form of tax expenditures. In Colombia, Argentina, Mexico, the Dominican Republic, Guatemala, El Salvador and other countries, for example, there are multiple unjustifiable tax privileges offered to companies located in so-called “free trade zones.” In Brazil and in other countries, generous tax exemptions are applied to the production of fossil fuels, sugary drinks and agrochemicals, sectors that negatively affect health and the environment. In Brazil and Argentina, the income of the richest (such as gains from capital income) is not included in personal income taxation. There are also inexplicable tax exemptions for cosmetic plastic surgeries (in Colombia and Ecuador) and for members of Parliament and the Judiciary in Argentina and the Dominican Republic.
How governments raise the revenues they need to support public spending is a fundamental aspect of public finance. Despite this, taxation has been the focus of limited analysis and action by civil society groups around the world, especially in developing countries. But in recent years, citizens and civil society organizations (CSOs) have become more aware of how their government’s tax policies are impacting their lives, and have started to question the impact of taxation on inequality and the illicit financial flows that deprive their countries of precious resources.
If taxation has been a difficult topic for civil society to come to grips, imagine how difficult it might be to look into taxes that are not being paid, for example as a consequence of tax breaks or fiscal incentives that governments may give to individuals and corporations in pursuit of various policy objectives. These so-called “tax expenditures” are often less transparent and subject to less scrutiny than normal taxes because they are negotiated outside of the normal budget cycle and are often linked to lobbying by powerful interests.
For the past two and a half years, the International Budget Partnership (IBP) has been working with a group of nine Latin American civil society organizations to promote research, advocacy, and learning around tax expenditures in the Latin American region. Each group conducted research to examine how governments were using tax expenditures in their countries and to assess the impact of tax expenditures on inequality, and is now using these findings to promote advocacy campaigns.
IBP recently published a summary of the country-level research findings in the paper “Tax Expenditures in Latin America: A Civil Society Perspective”. The picture that emerges is pretty discouraging: public information is often inadequate, decision-making processes are closed and prone to abuse and corruption, and impact, in the few instances where it is measured, is often negative.
While not all tax expenditures are necessarily bad, the closed nature of the decision-making process around them creates opportunities for governments to use them for political purposes. This results in benefits for a few powerful groups, and real costs for the rest of society. For example, in Brazil tax secrecy provisions prevent the names of companies benefiting from tax incentives from being published, making it impossible to know how much public money is destined to mining companies like Vale, which has been responsible for two major recent environmental disasters. Our Brazilian partner INESC implemented a campaign (see the video) to eliminate this secrecy. They published a report that looks at the magnitude of tax incentives for specific industries, and mobilized social movements and other organizations monitoring companies in Brazil to raise awareness of the issue.
Access to information is also critical in order to evaluate the impact tax expenditures have on inequality. ACIJ, our partner from Argentina, published a report on tax expenditures from an equity perspective, and organized a seminar on the issue with the University of Buenos Aires. The group also filed a claim before the Access of Public Information Agency (Agencia de Acceso a la Información Pública) after many attempts to get information on the companies benefitting from specific tax incentives and recently received a favorable decision that could have significant impact on tax expenditure transparency in the future: the Public Information Agency’s legal arguments against tax secrecy for companies that benefit from tax incentives can also be used by other CSOs that are part of the LATERAL project and beyond.
A third example comes from Peru, where our partner, Ciudadanos al Día (CAD), published a comprehensive study on tax expenditures in the country, highlighting the government’s lack of transparency and impact evaluation. CAD publicized their research findings via public events and the media. Partly as a response to their research and advocacy, one of the government’s key fiscal policy documents, the Multiannual Macroeconomic Framework 2019-2022, included a commitment to carry out a comprehensive review of tax expenditures and promote more transparency around the practice.
As our work continues with these incredible organizations in their journey to influence tax expenditure policies in their countries and across Latin America, we look forward to providing updates on the challenges and successes they encounter along the way.
Tax expenditures are defined as a government’s estimated revenue loss that results from giving tax concessions or preferences to a particular class of taxpayer or activity. Although they constitute a large – and often growing – burden on the public purse, they have generally been exempt from public scrutiny. They are often managed outside the regular budget process, reducing both transparency and consistent oversight. Tax expenditures represent a critical aspect of tax policy; they can impact inequality directly, by giving preference to certain groups over others, or indirectly, by reducing the revenues available for redistributive spending. Tax expenditures are especially significant in the Latin American context due to the magnitude of the revenue loss they cause and the resulting impact on public spending.
Over the past few years, IBP has collaborated with a group of Latin American civil society organizations in a research, advocacy, and learning project around tax expenditures and their impact on inequality in the region. Facilitated and coordinated by IBP, the Latin America Tax Expenditure Research, Advocacy and Learning (LATERAL) project aims to support civil society work in increasing the transparency, equity, and accountability of tax expenditure policies at the country and regional level.
The LATERAL project was motivated by the recognition that governments across the region, despite adopting language and policies promoting fiscal austerity and spending reductions, often fail to collect a significant percentage of revenues they are owed. Fiscal austerity policies currently being promoted across Latin America rarely include discussions on reforming or reducing the fiscal privileges governments distribute through tax expenditures. These policies often lack a clear assessment of their expected benefits or analysis of their impact on income distribution.
Given the opaqueness of legislation around tax expenditures, civil society has not had adequate space to engage, but the increasing amount of information being made publicly available, and the urgency of the fiscal crisis that many countries are facing, have resulted in a call for more debate and action.
In June 2018, IBP and its civil society partners in the LATERAL project will gather in Lima, Peru, to share findings of their respective in-country research along with the different approaches used to evaluate tax expenditures, even in data-poor contexts. They will reflect on their current country-based advocacy and communication efforts on tax, and the unique challenges they have faced. IBP and partners will then meet with the Latin America Tax Justice Network (Red de Justicia Fiscal de América Latina y el Caribe) before a presentation of the findings of the country-based research at the Tax Justice Network Annual Conference.
In conjuction with the workshop, IBP just released four publications generated by the LATERAL project. These resources provide an important framework to the issue of tax expenditures in the Latin American context:
Several challenges lie ahead in the pursuit of equitable tax policy, including navigating countries’ political economy constraints in order to eliminate privileges embedded in the tax systems. But the LATERAL project has already succeeded in building an energized community, where civil society members learn from and help each other improve research, advocacy, and communication around tax issues in the Latin American region.
Lateral Project Partners
Lateral Project Partners: ACIJ – Asociación Civil por la Igualdad y la Justicia (Argentina); CAD – Ciudadanos al Día (Peru); Dejusticia (Colombia); ICEFI – Instituto Centroamericano de Estudios Fiscales (Guatemala); INESC – Instituto de Estudos Socioeconômicos (Brazil); ISD – Iniciativa Social para la Democracia (El Salvador); Fundación Solidaridad (Dominican Republic); Fundar – Centro de Análisis e Investigación (Mexico); Grupo Faro (Ecuador).
For the June 2018 LATERAL Project workshop in Lima, Peru, IBP will benefit from the contribution of Friedrich Ebert Stiftung – Colombia, a nonprofit involved in projects on tax and equity in the Latin American region considering partnership with LATERAL’s civil society group members.