The report “Taxes on wages in Latin America and the Caribbean” show the elevated tax pressure on labor in South American countries.  

Argentina with 34.6%, Brazil with 32.2% and Uruguay with 30.5% show the greatest labor tax pressure in the region. These Latin American countries are far away from the Latin American and the Caribbean average of 21.7%.

These percentages are close to the average of the countries of the Organization for Economic Development and Cooperation (OECD), which is 35.9%.

The survey was developed under the hypothesis of an individual who is single, has no children and has an average income of the country where he lives.

The report “Taxes on wages in Latin America and the Caribbean” was developed by the Centre of Tax Policy and Administration of the OECD, the Inter-American Development Bank (IDB) and the Inter-American Centre of Tax Administrations (CIAT).

These percentages show interesting data: Uruguay reaches 30.5% including 15.3% of social security contributions paid by the employee, and 15.2% paid by the employer –the taxes on the payroll are added to the social security contributions paid by the employer to estimate these rates-. In the first case, Uruguay is the second country in the region with the largest average figure, only beaten by Chile with 18.2% – this country has the lowest percentage of employers’ contributions (4.4%).

The average labor tax in the region includes 0.3% of income tax, 7.7% of social security contributions paid by employees, and 13.6% paid by the employer. While in OECD countries the average tax includes 13.3% income tax, 8.3% of social security contributions paid by the employee, and 14.3% paid by the employer.

The lowest tax pressure in the region is that of Honduras, with 10%, followed by Trinidad and Tobago (11%), and Guatemala (13.2%). In South America, Venezuela has the lowest tax burden with 17.4%, followed by Peru with 17.5%.

The report analyzes the average tax rate of an individual, adding taxes over income and mandatory contributions to the social security paid by workers and presenting the result as a share of the net wage.

Chile leads the list with 19.1% of labor income destined to pay taxes, followed by Uruguay with 18% and Argentina with 17%. Honduras (3.6%), Guatemala (4%) and Trinidad and Tobago (4,5%) register the lowest rates in a region with a 9.3% average rate.

Workers from every country in the region, with the exception of Mexico (it has an average income tax of 8.5%), do not pay income taxes if they are paid an average salary. According to the study, this shows the weakness of incomes taxes as tools for tax collection based on salaries in Latin America and the Caribbean. The high levels of income that do not pay taxes, the extension of informality, and the prevalence of tax expenditures caused by personal and basic deductions are facts that explain the situation”.

Researchers consider that “in every country in Latin America and the Caribbean, the participation of contributions to the social security systems made by employees is very significant”, and in every case they are way above the payment of income taxes.

“This situation is very different to the OECD average, where the percentage of income taxes is higher than the contributions paid by employees”, the survey concludes.

Forwardness by decile is also quite noticeable in Latin America and the Caribbean: “single workers with no children in decile 1 have a tax pressure of 10.8% that grows as their income grows till reaching 25.9% in decile 10. For couples with two children it starts with 7.1% in decile 1, until reaching 25.7% in decile 10”.

To analyze the impact of family burdens, the study compares taxes for single workers with no children against the taxes paid by a married couple with two kids and a single source of income, with both of them earning the average salary of the country.

Researchers concluded that tax systems in the region “do not offer generous tax reductions or elevated cash transferences for homes with kids and average incomes, which means there are only small variations in the tax burden for workers with children than for workers who do not have children”.

The tax pressure for a married couple with just one source of income and two kids is 21.4% in average in Latin America and the Caribbean, just 0.3% less than for single workers. “The different between these types of family in the OECD countries is close to 9.5% as there are more benefits offered to families”. In Argentina, Uruguay, Colombia and Costa Rica, “households with average wages have small differences in terms of tax pressure due to family benefits”.

Source: El País