How do the Tax Burden and the Fiscal Space in Latin America look like? Evidence through Laffer Curves

How much fiscal space do Latin American countries have to increase their tax burdens in the long term? This paper provides an answer through Laffer curves estimates for taxes on labor, capital, and consumption for the six largest emerging economies of the region: Argentina, Brazil, Chile, Colombia, Mexico, and Peru. Estimates are made using a neoclassical growth model with second-generation human capital and employing data from the national accounts system for the period from 1994 to 2017. Our findings allow us to compare the recent effective tax rates on factor returns against those which would maximize the government's revenues, and therefore to derive the potential tax-related fiscal space. Results suggest that joint fiscal space on labor and capital taxes would reach 6.5% of GDP for the region, on average, and that there are important differences among the countries.

Laffer points, area of fiscal contradictions and taxpayers’ acceptance power

The Laffer curve is the eternal problem of mathematical economics. Attempts to find the Laffer curve functions lead to new results that do not give the function in coordinates “tax burden - tax revenues” but give results in larger dimensions. Purpose of the article is developing tools to access the excessive tax burden on organizations. The general methods used in the article are analysis, generalization, synthesis. Special methods are mathematical induction, mathematical methods. In the study previously proposed mathematical models of Laffer curves by V.G. Papava (Ananiashvili, Papava, 2010) and E.V. Balatskii (Balatskii, 2000) are generalized and clarified. Taxation limit concept is expanded and necessity of determining the lower taxation limit is shown. The new approach to determining the values of Laffer points based on the use of tax burden and current assets turnover ratio is proposed. The determination of taxpayers’ acceptance power (in meaning “exponent”) is introduced and the property linking it with area of fiscal contradictions is shown. The constancy of the location of the first and second kind Laffer points is proved. Conditions limiting the sets of values of Laffer points are given. As a result the concept of the area of fiscal contradictions is divided with concepts of Laffer curves and Laffer points.

Laffer Curves and Home Production

In the earlier related literature, consumption tax rate Laffer curve is found to be strictly increasing (see Trabandt and Uhlig (2011)). In this paper, a general equilibrium macro model is augmented by introducing a substitute for private consumption in the form of home production. The introduction of home production brings about an additional margin of adjustment – an increase in consumption tax rate not only decreases labor supply and reduces the consumption tax base but also allows a substitution of market goods with home-produced goods. The main objective of this paper is to show that, after the introduction of home production, the consumption tax Laffer curve exhibits an inverse U-shape. Also the income tax Laffer curves are significantly altered. The result shown in this paper casts doubt on some of the earlier results in the literature.