How Do Wealth Taxes Work In Latin America?

Gustavo Petro has just started being president of Colombia. He has already begun his movements, the one that has caused the greatest impact, so far, is the tax reform proposal, where the direct tax on wealth stands out. In this sense, and regarding Petro's proposal, we have reviewed other cases of this type of tax in Latin America.

The tax reform initiative in Colombia

Latin America is one of the most unequal regions in the world, most of its economic resources are concentrated in the hands of a minority of the population. This inequity in the distribution has led governments to look for alternatives to combat it. To better understand this problem, we can rely on the Gini Coefficient, created to measure income inequality and wealth distribution. This index is a figure that is between 0 and 1, where 0 means that there is no inequity and 1 that it is totally inequitable. Also sometimes it is presented between 0 and 100.

According to data from Statista, in 2021 this coefficient stood at 50.4 for Colombia, which shows that inequality in the distribution of wealth is one of its biggest problems. In this same ranking, the best-evaluated country is El Salvador with 38.6, while the worst is Brazil with 53.9. In the middle of the table are Mexico and Chile with 45.4 and 44.4 respectively. Still, regardless of its position in the ranking, Latin America has a lot to resolve on issues of inequality.

It is in this context that President Petro has sent to Congress a reform initiative with which he seeks to increase tax collection by eliminating tax benefits for people with higher incomes, combating tax evasion, and directly charging a tax on wealth that goes from 0.5 to 1% depending on annual income. For people who earn less than $1,000 a month, the intention is that there will be no major changes, according to the Los Angeles Times. The strategy also includes taxes on sectors such as energy, mining, and food, in the case of the first two when exceeding an export limit.

Taxes on wealth, the solution to inequality in Latin America?

Taxes are not strictly speaking an exclusive issue of the left or the right; in the Colombian case, former President Duque also attempted a tax reform. However, the approach and timing of it worked against him. Tax measures are always a problem for any government in any part of the world when the tax burden is hardened on the middle class and not on the great fortunes, which makes them an unpopular measure. We have taken as an example 5 cases in Latin America and how they have responded to the tax issue, inequality and great fortunes.

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Mexico

Like Petro, López Obrador promoted greater collection by eliminating tax benefits for companies, in addition to toughening measures to prevent evasion and thus finance his infrastructure projects and social programs. Large companies were threatened by the eye of the government that has charged them debts or inconsistencies in their tax payments. The Mexican president even proposed that a tax be levied on global fortunes to finance the fight against poverty and inequality in the world.

Brazil

The largest economy in the region, still headed by Jair Bolsonaro, has a tax system designed to benefit businessmen and investors, since it has provided all kinds of support and tax benefits so that they pay less taxes, not to mention large fortunes. For Bolsonaro it is unfair to charge taxes to those who produce jobs, on the contrary, he asks to help them with low taxes. However, the level of inequity in Brazil is clear.

Chile

Another country that also recently passed a tax reform was Chile. President Gabriel Boric's project has as one of its objectives to collect a tax on wealth (from 5 million dollars) considering all kinds of goods. Interestingly, the legislation also takes into account those who leave Chile and want to take their fortunes with them, they will be charged an exit fee of 5%, a harsh measure, but one that could be a model to prevent large fortunes from leaving the country.

Uruguay

The country has a Wealth Tax, it is important to highlight that wealth is a word that can lend itself to ambiguity, so defining it precisely, in terms of the law, can be a challenge. Therefore, what may be subject to having a tax differs from one country to another. In Uruguay, it can range from 0.4% to 1.5% depending on factors such as income level and accumulated assets.

Argentina

The constant economic crises to which Argentina has been subjected have caused a great impact on the population, which has seen its income decrease and its currency devalued. Given the need for collection, President Fernández proposed an extraordinary collection measure created to finance social programs and face the crisis during the pandemic, this initiative is called "Extraordinary Contribution", although the business sector saw it more as an unfair measure.