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Tax Reform Now!

Latin America should go to the mat with the fat cats.

AN AUDIT IS A REVOLUTIONARY CONCEPT in Brazil, where the former head of the Receita Federal--the local Internal Revenue Service--once said only "saints and idiots" pay taxes.

So it came as no surprise when the National Commercial Confederation (CNC), a prominent Brazilian business association, challenged a new law that allows the government to investigate bank transactions of individuals and corporations suspected of evading taxes.

The biggest tax dodgers are the Latin American rich, who have long refused to pay and react with anger or lawsuits when governments attempt to tax their properties, profits and earnings. While living in Brazil, I wrote a story on tax evasion that showed that 40% of Brazil's 460 millionaires in 1995 reported incomes of only US$18,000. One businessman, worth $19 million, paid just $2,100 in taxes.

These scofflaws typically hide their wealth in dummy corporations or disguise huge amounts of personal income and assets as corporate holdings. For example, a Rio millionaire with a yacht and jet can claim that it belongs to his (fictitious) tourism agency. That agency, which never earns money, never pays taxes. Wouldn't want that to be audited, right?

The law also gives the Brazilian government the right to examine a suspect bank account, a clause that has the CNC in a dither. "We are simply trying to defend citizen rights," a CNC official said. Sure, the right to evade taxes.

To be sure, Latin America--Brazil included--is making a concerted effort at tax reform. Officials are well aware that the complex tax codes, which rely not on direct taxes on personal wealth but regressive and indirect taxes, heap the burden on the shoulders of the working poor and middle class. The chronic inability to collect taxes means no balanced budget, IMF restrictions, sub-par public schools and hospitals, highways riddled with potholes and governments strapped for cash to combat poverty.

While the average revenues from taxes for developed countries is 29% of gross domestic product, in Latin America it is just 13.6%, according to the U.N. Economic Commission on Latin America. (In contrast, taxes are 30% of GDP in the United States).

In Brazil, President Fernando Henrique Cardoso turns to temporary taxes when he needs revenues. In Mexico, President Vicente Fox imposed a 15% tax on food and medicine, a surefire formula to increase revenues and decrease personal popularity. Fox is well aware that it would take years for the Mexican Congress to approve tax reform in a nation where taxes are only 11% of GDP. In Ecuador, tax evasion became so prevalent that the Congress abolished income tax in 1999 in favor of a 1% tax on financial transactions in hopes that the new levy would be easier to collect. In Guatemala, powerful coalitions of financial and agricultural groups have refused to pay taxes and have blocked all efforts at reform.

In the era of globalization, Latin American governments have been efficient when selling off state-run corporations, destroying or weakening labor unions, slashing public budgets and, in at least two cases, taking the radical step of changing the national currency to the U.S. dollar. But creating an equitable and progressive tax structure? They are unwilling to go to the mat with the fat cats.

It is time Cardoso and others Latin American leaders make them pay their fair share.
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Publication:Latin Trade
Date:Apr 1, 2001
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