Download The paradox of progressivity in countries with low levels of taxation

The paradox of progressivity in countries with low levels of taxation:
Income tax in Guatemala
Summary of an article published in the CEPAL Review N° 102, December 2010
Authors: Santiago Díaz de Sarralde, Carlos Garcimartín and Jesús Ruiz-Huerta
Experts tend to use the Kakwani index (1977) and ReynoldsSmolensky index (1977) to analyse the effects of a fiscal
reform on progressivity and redistributive capacity.
However, these are not always appropriate to carry out
normative valuations of fiscal reforms that involve
significant changes in receipts.
This problem is particularly serious in countries with low
levels of taxation, where levels of tax evasion are likely to be
higher and tax systems tend not to be very equitable.
Using the conventional indices in this case leads to mistaken
perceptions. This points to the need to develop other
mechanisms able to assess fiscal reforms that generate
changes in receipts, so as to supplement the information
provided by traditional indicators.
Two separate concepts are used for this: the tax bracket and
the distance between net incomes or tax liabilities. The aim
of this separation is to have another instrument of analysis to
evaluate the design of fiscal structures with different revenue
effects, both in terms of progressivity and redistributive
capacity.
The authors of this article analyse the case of Guatemala,
which has one of the lowest levels of taxation in Latin
America, and apply this new methodology to analyse
personal income tax. Guatemala taxes a strikingly low
proportion of personal income, while tax on companies and
consumption is relatively high.
excessively low due to reasons that go beyond high levels of
informality and the extreme inequality within Guatemala.
By way of conclusion, the authors point out that, according
to traditionally used indicators, a reform that generates the
necessary increase in the revenue capacity of the fiscal
system will appear regressive. However, this apparent
regressivity is only the result of the increased revenue
capacity itself, rather than a narrowing of the gap between
what is paid by high- and low-income taxpayers. In
Guatemala, conventional indicators would suggest that
taxation is less progressive. However, in both cases the
differences in tax paid by higher and lower income groups
increase, which appears to contradict what was said
previously. On the contrary, this proposal clearly shows that
reduced progressivity is merely the result of a higher average
rate following the reforms, but that the cost of reforms will
have a greater impact on higher-income taxpayers.
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The CEPAL Review was created in 1976 under the leadership of Raúl
Prebisch. The publication has been a vehicle for the ideas that emerge
from ECLAC and the efforts of researchers analysing Latin American and
Caribbean reality and discussing approaches, strategies and policies aimed
at driving equitable development in the region’s countries. Available
online: http://www.eclac.cl/revista/
According to a more detailed analysis of taxation by sources
of income, wages (income tax for employees) make very little
contribution to tax revenues: 0.13% of GDP, or 3.92% of
overall income tax. This is in contrast with the proportion
represented by the same wages in GDP, which stood at 32%
in 2006 according to National Accounting data. This
represents a mere 0.34% of the total wage bill, which is
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