The International Monetary Fund (IMF), in new research published this week, is prescribing tax reforms, including tax rate reductions in Latin America and the Caribbean (LAC) in order to address fiscal challenges emerging in the region as public debt also rises.

The report states that there is too much reliance, currently, on corporate income tax, even while personal income tax structures also disproportionately benefit rich households in the LAC region.

In a paper entitled “How Taxes Can Support Growth and Reduce Inequality in Latin America and the Caribbean,” published on December 14, researchers Santiago Acosta Ormaechea and Samuel Pienknagura Loor noted that the recommendations come as public debt levels rise across the region.

“Public debt ratios in Latin America and the Caribbean (LAC) increased by about 10 percentage points of GDP (gross domestic product) in 2020,” they said. Countries in the region are under pressure to cut public spending and/or raise taxes, even in the face of widespread needs to respond to the pandemic.

The solutions proposed are “well-crafted tax reforms that can support growth while helping countries maintain fiscal sustainability.”

The researchers identified weakness in regional personal income tax collection systems including “low statutory rates, excessively high-income thresholds, and widespread and regressive deductions (which tend to benefit the rich), all of which erode the tax base and worsen income distribution.”

It is recommended that governments in the region reduce personal income tax (PIT) deductions, the IMF researchers said, “in a way which would simplify the system, increase revenue, and make taxation more progressive — so an individual who earns more also pays more taxes — without levying additional taxes on low- or middle-income formal workers.

They mooted, “if personal income tax deductions were eliminated (stripping the PIT system down to its statutory rates), the average country would see a twofold increase in PIT revenues, by raising the effective rate faced by the top 10 per cent of wage earners. Importantly, this would also increase equity.”

It is also suggested that policy makers provide “well-targeted incentives to low-wage earners, through, for example, an earned-income tax credit (EITC), could encourage their participation in the labour market and help reduce the gender gap and could also incentivise labour formalisation.”

As regards corporate income tax (CIT) the IMF researchers said rates should be aligned “to help attract investment and alleviate profit shifting, while reducing tax benefits and deductions could level the playing field.”

It was further suggested that, to address equity concerns, LAC countries could “strengthen the VAT by tackling reduced rates and exemptions combined with well-targeted transfers that encourage the use of electronic payment methods.”

The IMF researchers said that the digital economy, which has grown under the pandemic.