VAT ‘regressive’, says World Bank official

While describing the Value Added Tax (VAT) as a regressive and high tax in Latin America and the Caribbean, the World Bank has suggested that some Central American countries could increase income tax in an effort “to avoid growth rate challenges”.

This was highlighted on Tuesday by the World Bank’s Chief Economist for Latin America and the Caribbean William Maloney, as he discussed aspects of the Caribbean Economic Review, New Approaches to Closing the Fiscal Gap.

The literature suggests that there was room for increases in the VAT in those Latin America and Caribbean countries “with low initial VAT rates”.

However, Maloney said he did not see any wiggle room for governments to tack on an increase in VAT given that it was already high and affected the most vulnerable.

“The Value Added Tax in the region is high. It’s regressive. It tends to hit relatively more poor households and it has [a] more negative impact on growth at very high levels. So we probably don’t have a lot of room in the region for increasing there,” said Maloney.

He dismissed the idea of countries in the region introducing new taxes, saying this was “tricky” since it required balancing revenue, progressivity and growth.

Maloney explained that while high taxes could “make our economies much more progressive” it could slow growth, depending on the level and type of taxation.

Maloney described income tax in Latin America and the Caribbean as “moderate” by global standards.

Effective January 2020, the income tax rate in Barbados was set at 12.5 per cent on taxable income up to $50,000 and 28.5 per cent on taxable income above $50,000.

With regard to Central America, the economist said corporate taxes were relatively high and there was room for simplification, which he said would probably increase compliance.

“The new area of focus is on income taxes because they look low on average in the region and they can be extremely progressive because we can tax high-income earners more,” he added.

“While the average level of income taxation is very low in Latin America, that’s largely because we are only taxing a very narrow segment of the population, basically the top ten per cent compared to the United States, which is about 18 per cent.

“This very narrow focus explains the larger negative effects on growth that we see with income taxes and probably the conclusion of this is we have to be careful in thinking through these reforms, but we are probably going to have to broaden the tax base if we are going to avoid growth defects,” he said. (MM)