Billionaires Can’t Pay Latin America’s Covid Tab


Pandemic, schmandemic! As Covid ravages Latin America, the material fortunes of its wealthy may have never fared better. The region’s billionaires saw their rarefied ranks grow by one new member every week from March to July, while the collective stash of the megarich increased by $48 billion, according to a report by Oxfam.

Little wonder that the nations that blew up their budgets and ran up debt during the outbreak now look to the ultra-wealthy for relief. Argentina took the lead: Its legislature voted on Dec. 4 to impose a one-time wealth tax on the superrich. Around 12,000 well-heeled Argentines with a net worth of at least $2.4 million will be tapped to defray the cost of Covid cash and emergency credits. The collective levy is expected to generate a one-off benefit of around $3.75 billion.

Many Latin Americans have hailed the Argentine decision and are pushing their own top-of-the-pyramid taxes. Granted, the relatively small group of high wealth individuals – 673,000 millionaires, representing 1.4% of regional population – makes a satisfying target. Latin America’s richest 10% own nearly 72% of total wealth, according to Credit Suisse. Compare that with the bottom two-thirds of society, who control less than $10,000 per capita. Yet the temptation to hit up the comfortable classes to solve the fiscal calamity could lead to uncertain outcomes both for revenue and social justice.

The superrich alone cannot reverse the devastation brought on by the pandemic, let alone close Latin America’s gaping wealth gap. “Even a politically sustainable wealth tax will raise only a small amount of gross domestic product,” said University of Manchester poverty and social justice scholar Armando Barrientos. “This is not going to be the solution. Even if you go for a wealth tax, it has to be part of broader reform, which requires political consensus, and given vested interests, that is far from guaranteed.”

Justified as it may be, episodically soaking the rich to solve a fiscal crisis could raise fears over policy reliability, rules for investment and state confiscation – a docket that only corporate lawyers could love. One Miami law firm told Bloomberg Tax in July that the mere talk of new Latin American wealth taxes had provoked a five-fold increase in the number of moneyed clients prepared to relocate to more tax-friendly domiciles. Some 13,000 Argentines have already moved across the border to Uruguay where the pandemic is under control and the government is encouraging high-end immigration by easing tax and residency requirements.

A more urgent threat than the sight of Latin American superyachts hoisting anchor and taking their money elsewhere is the distraction from the urgent task of overhauling the region’s misgoverned welfare networks and the dysfunctional fiscal arrangement that drains them.

Home to the world’s biggest wealth gap, Latin America is long overdue for a new deal. The region cannot recover from the worst social and economic crisis in memory by doing more of the same or putting a Band-Aid on the current broken system.

That imperative has led policymakers to propose rewriting the social pact, with aspirational schemes ranging from universal health care to unconditional basic income for all. Yet how to fund and then sustain such generous proposals and still pay down the massive debts and disarm the fiscal traps created during the crisis, all without chasing a way skittish capital and investment? No nation can pull that off without resetting its tax system.

The overall tax burden varies widely across Latin America and the Caribbean: it’s as onerous in Cuba and Brazil as it is paltry in Guatemala and Panama. Yet most nations share a trademark distortion: The tax base is both too narrow and to indulgent to the well heeled.

While annual levies on wealth have increased nearly three-fold over the past seven decades, more than half (55%) of the regional tax take comes from corporate profits, and less than a third (32%) from individuals.

Personal income kicked in just 9.5% of all regional tax revenues in 2015, compared with 24.4% in the nations of the Organization for Economic Cooperation and Development (OECD). Meanwhile, Latin America charged nearly twice as much corporate taxes as their rich world peers.

The imbalance is bad economics, because taxing production hobbles trade and labor competitiveness, while giving the rich a pass is lousy social policy. That imbalance also worsens the scandalous gap between haves and have-nots. Once decanted through faulty welfare systems, personal income taxes account for just a 2% reduction in Latin American income equality, the OECD found. In the European Union, by contrast, inequality improves by 12% after redistributing income taxes.

Consumption taxes make the disparities worse. Latin American and Caribbean nations rely on goods and services for more than half of their tax haul, while the OECD draws about a third of its taxes from the same source. Since consumer goods are taxed mostly at a flat rate, they hit hardest those with the shallowest pockets, who spend a far larger share of their earnings than the rich for basic necessities. “Latin America gets the tax logic backwards,” said Princeton University professor Marcelo Medeiros, who studies poverty and inequality and public policy. “More than raising more money, we need to spend our tax revenues better and invert the tax pyramid.”

A broadening of the tax base would help, but faces structural hurdles. With 53% of the region’s labor force in the shadow economy, millions of informal workers file little to no income taxes even as they shoulder more than their share of consumer taxes. That arrangement has left an already vulnerable class even more precarious during the pandemic, which has eliminated more working hours in Latin America than any other region.

Creating a fairer social pact is a mandate for countries not just to tax more but better.  Since colonial days when tax collectors figured that landed gentry couldn’t just pack up their farms and run, Latin America has been better at assessing physical goods (homes, cars, pleasure boats) than net personal wealth, which is mobile and fungible. Brazil is one of the few countries where corporate dividends are distributed to shareholders tax free. Little wonder that when economic analysts folded financial wealth into the census data on income, they found that last decade’s record improvement in Gini score, which gauges income inequality, looked far less impressive.

“No one is arguing the rich can’t pay more,” said Alberto Ramos, an emerging market economist at Goldman Sachs. “But we have deficits everywhere. Countries have to pay for education, health, security and national defense. We need to think of what sort of entitlements society needs and how to fund them. You can’t just single out one social sector to shoulder the tax burden and say problem solved.”

The pandemic has played its part in exposing Latin America’s frailties. Gradually, a sustained recovery could revive the fortunes of the once-burgeoning middle class. But to secure such gains against future reversals, civil society and its elected authorities must seize this emergency as an opportunity for equitable reform instead of just another crowd-pleasing quick fix.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Mac Margolis is a Bloomberg Opinion columnist covering Latin and South America. He was a reporter for Newsweek and is the author of “The Last New World: The Conquest of the Amazon Frontier.”

©2020 Bloomberg L.P.

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