Latin America’s fiscal strains are nothing new. Its problems stem from an obstacle with two faces: the formation of states that have historically been relatively weak—that is, they collect few taxes—and a marked proclivity toward populist cycles in which more is spent than is collected, and more than can be financed sustainably. The explanations that account for this fundamental imbalance are more complex than what is sometimes read in the press or goes viral on social media: rampant corporate corruption, public waste, widespread aversion to taxation, capture of the state by economic elites, and so on.
When not chaotic, public finances in the region appear fragile. Leaving aside Venezuela’s tragic position, the diagnosis of public debt traders indicates that by the end of 2025 risk premiums were high across much of the region. The fiscal balance (as a percentage of GDP) shows that many nations face serious challenges. In Brazil, Mexico, and Panama, deficits of 5% or more are currently projected, while Ecuador and Uruguay reach 4%. Although there is no magic number for the optimal deficit, the International Monetary Fund usually suggests that sustainable levels range between 1% and 3%.
It is a fact that, compared to developed countries, the region’s tax levels appear low. A recent OXFAM report shows that average tax revenue in Latin America stands at 21.3% of GDP, while for the club of OECD member countries it reaches 33.9%. The gap—over twelve percentage points—is wide, despite having narrowed over the past 20 years.
Moreover, the inequitable elements in the composition of revenue are undeniable. It is not unusual to find that the effective tax rate on income earned by individuals in the highest percentiles of the population (the wealthiest of all) is lower than that of other percentiles that may represent middle-class incomes.
Now, beyond its low levels and inequity, the region’s tax system is decidedly complex. And this complexity reveals privileges. A document from UNDP–Latin America and the Caribbean shows that tax revenues not collected by the state due to special treatments such as various types of exemptions amount to very significant sums. As percentages of GDP, such exemptions range between 2% and 4% for Peru, Guatemala, Argentina, Chile, Jamaica, El Salvador, and Mexico; between 4% and 6% for Brazil, Ecuador, and Costa Rica; and above 6% for the Dominican Republic, Uruguay, and Colombia.
If upcoming tax reforms in the region correct these two structural deficiencies (inequity and exemptions), revenue levels will have been homogenized, to the extent possible—given our reality—with those usually considered benchmarks.
And Latin America would be mistaken to set OECD-type revenue levels as a short-term goal, since the region is economically and demographically different from most of those countries. Let us examine three aspects.
OECD economies are, on average, significantly more prosperous, meaning their inhabitants have higher incomes (at least three times those of Latin America, on average) and can therefore be taxed at higher rates. They are farther removed from subsistence and vulnerability levels.
Informal employment, according to the most recent statistics compiled by the International Labour Organization, shows that the average rate of informal employment in OECD countries does not exceed 15%, while in Latin America it is close to 50%. Around half of the population in our region has a primary or secondary job that, in practice, is not subject to labor regulation or social protection. This implies they also do not regularly contribute to social security. Labor informality limits the effective universe of taxpayers.
In addition, the region experienced a relatively late demographic transition. In 1985, for example, the median age of the population—which divides it into two equally sized groups—was below 20 years old, with the exception of Argentina, Chile, Cuba, and Uruguay. Thus, the population of working and contributing age had been far smaller than the proportion of contributors who built (by funding with their taxes) the Universal Welfare States of the OECD, characteristic of the second half of the last century.
Therefore, with current levels of productivity and income, prevailing informality, and the demographic dividend window closing, the room for maneuver to expand the Latin American state is more finite than is often believed.
The path of the much-acclaimed structural tax reforms—through the elimination of special treatments and the strengthening of progressivity—is unavoidable. Especially with regard to individuals with high and very high incomes.
In the absence of high rates of economic growth sustained by increases in productivity, the return of populist leaders to power will exacerbate spending, guaranteeing a new (severe) round of fiscal and social crises in the region.
Autor
PhD in Economic History from London School of Economics & Pol. Science. Postdoc researcher at the Univ. of the Andes. He has been a visiting professor at the Pompeu Fabra Univ. (Barcelona) and Dean of the Faculty of Economics at the Tadeo Lozano University (Bogotá)
