Wednesday, October 07, 2009

Latin American tax consensus undermining the poor

In its new report Undermining the Poor: Mineral Taxation Reforms in Latin America (click here for the version en Español) Christian Aid note that:

"Unfortunately, NGOs and social movements have been absent from the tax-reform debate for too long. Instead, in the last few decades we have seen a highly inappropriate ‘donor tax consensus’ implemented in developing countries."

We've already written about a Tax Consensus that has had profound effects on impoverishing people around the world. As the new report notes,

"repeated cuts in corporate tax that have undermined progressive income taxation and a growing reliance on – often highly regressive – consumption taxes (eg VAT). As part of the trade liberalisation agenda, countries have seen their revenue from trade taxes dwindle, even though these taxes have traditionally been very important for low-income countries."

This in-depth report looks closely at mineral taxes in Latin America, where tax policy and tax collection is mired in trouble:

"In contrast to the OECD nations, which collected 35 per cent of their GDP in taxes between 1990 and 2006, pure tax revenue in Latin America, as a percentage of GDP, was just 16 per cent. In fact Latin America is best compared, in taxation terms, to sub-Saharan Africa, which collected 15.9 per cent of its GDP in tax in 2006."

And it gives some egregious examples of what has happened when countries have been bullied into giving special tax privileges to foreign investors. In Guatemala in 2006, the fiscal cost of this tax incentive to one mining company exceeded Guatemala’s total spending on health infrastructure. In Honduras:

"In 2007, it is reported that the minerals sector – worth US$198m that year – contributed only US$283,000 in royalties, licences and fees together, giving the government an almost unheard of 0.1 per cent share in the sector’s turnover."

This is even worse than the finding in Christian Aid's 2007 report A Rich Seam that Zambia only took 0.7% of the value of its copper as state revenue.

It is excellent that at last, people are waking up to the problem, and all credit to Christian Aid for having the courage to blaze a trail, ahead of nearly every other non-governmental organisation. Even the IMF seems to have started doing so, noting recently in its first ever study of its kind (why has it taken so long?) that tax holidays and lower corporation taxes don't seem to boost growth. This latest Latin America report follows the broader Breaking the Curse report from March this year, highlighting a number of wider problems.


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