Towards Smarter and Fairer Taxation to Unlock Growth in Latin America & Caribbean

The report Rethinking Taxation for Growth in Latin America and the Caribbean, produced by the World Bank in partnership with the Inter-American Development Bank (IDB), the Organisation for Economic Co-operation and Development (OECD), and the Economic Commission for Latin America and the Caribbean (ECLAC), offers a stark assessment of the region’s fiscal landscape. It finds that despite decades of attempts at reform, tax systems in Latin America and the Caribbean remain fundamentally unfit for purpose. They generate too little revenue, place disproportionate burdens on poorer households, and do little to correct inequality. The authors argue that the issue is not simply collecting more taxes, but collecting them in a way that supports growth, fairness, and trust. Without such rethinking, the region risks remaining locked in a cycle of underfunding, weak services, and citizen mistrust.

Low Revenues and High Inequality

On the surface, the region’s challenge is one of scale. Governments in Latin America and the Caribbean raise, on average, just 22 percent of GDP in tax revenues, far below the 34 percent collected by countries in the OECD. This shortfall leaves states with limited fiscal space to invest in infrastructure, education, healthcare, and climate adaptation. Yet the problem is deeper than low revenue. The structure of taxation itself is skewed. Consumption taxes, such as the value-added tax (VAT), dominate, accounting for the lion’s share of revenues, while personal income taxes remain shallow and ineffective. As a result, the poor often pay proportionally more, while the wealthy can shield income through deductions, exemptions, or outright evasion. The redistributive effect is minimal: while taxation and transfers in the OECD reduce inequality by as much as 17 points on the Gini index, in Latin America the effect is a meagre two points. This failure to redistribute leaves inequality entrenched and perpetuates a sense that the system is rigged against ordinary citizens.

Structural Flaws and Political Resistance

The report highlights the technical shortcomings in detail. Personal income taxes are weakened by overly generous exemptions and deductions that benefit upper-income households. Property taxes, which could provide stable and progressive local revenues, are underutilized and poorly administered. Corporate income taxes appear high on paper but are undermined by profit shifting, loopholes, and special tax incentives. At the same time, compliance is poor: evasion rates reach as high as 50 percent for personal income tax, representing a massive drain on state capacity. These weaknesses are exacerbated by the prevalence of informality, which encompasses approximately half of the region’s workforce. Yet beyond technical design, the study stresses that reform is also blocked by politics. Powerful vested interests resist changes that would expand the tax burden for elites, while widespread mistrust of government deters ordinary citizens from supporting higher taxation. Many see little connection between what they pay and the quality of services they receive, creating a vicious cycle of weak compliance and underfunded public goods.

Towards Fairer and Smarter Taxation

Despite these hurdles, the study identifies promising avenues for reform. It calls for a rebalancing of the tax mix away from regressive consumption taxes and toward instruments that are more progressive and sustainable. Expanding personal income tax coverage, improving property tax administration, and introducing wealth taxes could enhance fairness and revenue. Environmental levies, particularly carbon pricing, could serve the dual purpose of raising funds while aligning fiscal systems with climate goals. Equally important is modernizing tax administration. The report points to successful innovations in countries like Chile, Mexico, and Brazil, where electronic invoicing, real-time data analytics, and digital identification systems have sharply improved compliance and transparency. Replicating these tools across the region could help to curb evasion and broaden the base. The authors argue that reforming tax systems is not only a fiscal necessity but also a moral one: taxation must be seen as a tool for equity and nation-building, not just a means of extracting revenue.

Rebuilding the Fiscal Contract

A crucial theme running through the report is the need to rebuild the fiscal contract between states and citizens. Taxes will only be accepted if people see that revenues are used effectively to deliver better services and opportunities. That requires not only redesigning taxation but also improving the quality and transparency of public spending. Governments must demonstrate that higher revenues translate into tangible benefits in education, healthcare, infrastructure, and security. At the same time, reforms must be framed as part of a long-term development strategy that tackles inequality and builds resilience to climate change. Without reform, the region risks falling further behind, trapped in a cycle of underfunding and low trust. With reform, Latin America and the Caribbean could embark on a more virtuous path, where higher revenues finance stronger public goods, strengthen institutions, and create a foundation for inclusive growth.

The message from the World Bank, IDB, OECD, and ECLAC is both urgent and clear. Latin America and the Caribbean do not simply need more taxation; they need better taxation, fairer, smarter, greener, and more trusted. Only by rethinking the role of taxes can the region unlock its potential for growth, equity, and sustainability in the decades ahead.