Achieving Growth and Security in the Northern Triangle of Central America by Perkins Christina;Nealer Erin; & Christina Perkins & Erin Nealer

Author:Perkins, Christina;Nealer, Erin; & Christina Perkins & Erin Nealer
Language: eng
Format: epub
ISBN: 9781442279810
Publisher: Center for Strategic & International Studies
Published: 2016-12-05T00:00:00+00:00

Taxation: Broadening the Base

The governments of the Northern Triangle have some of the lowest tax-to-GDP ratios in the Western Hemisphere. As a result, they are constrained in their ability to respond to threats from gangs, train and hire police and judges, build roads, provide public services such as power and water, ensure adequate social safety nets, and create a network of accessible and high-quality public schools.73 Technical solutions to collect tax revenue will not fix the Northern Triangle’s convoluted, corrupt tax systems, as successful taxation requires political will, competent administration, effective collection, efficient spending, and transparency and accountability throughout the budgeting process. Broadening the tax base in Northern Triangle countries should remain a donor priority.

USAID has been working on tax systems in El Salvador for many years, and its efforts on tax-reform issues has been correlated with an increase from 6 to 14.9 percent of GDP from 2004 to 2014.74 USAID’s program set out to increase tax revenue in El Salvador to 16 percent of GDP by the end of 2015. USAID’s investment of $3.6 million in fiscal management has yielded approximately $230 million in additional tax revenues, which means that every dollar USAID invested in tax reform since 2011 generated an additional $63 dollars of domestic revenue. However, government spending has exceeded revenues over the past several years, and the government of El Salvador has been facing a recurrent cash flow crisis.75 Guatemala has one of the lowest tax-to-GDP ratios in the world at just 10 percent, and the economy suffers from 65 percent informality. Informal markets throughout the country do not pay value added tax (VAT), and consequently, Guatemala has the lowest VAT collections in the region at 12 percent, compared to Honduras at 15 and El Salvador at 13 percent.76 Those in the service sector also generally fail to pay taxes, opting for informality instead due to a high minimum wage and limits on hourly contracting. Guatemala’s corporate tax rate is also on par with many Organization for Economic Cooperation and Development (OECD) countries, which further discourages enterprise formalization and prevents potential broadening of the tax base.77

Guatemala’s tax-collection levels have also decreased in recent years, down from 12 percent to 10.8 percent; though some believe actual levels collected are closer to 8 percent of GDP. The Guatemalan tax base is small, and the budget remains unfunded. In August 2001, plans for tax increases prompted widespread, and often violent, protests in Guatemala.78 President Jimmy Morales is expected to confront tax system reforms during his presidency.79

While Honduras has a relatively high GDP ratio for the region at 15 percent, public financial management remains weak and requires reform. Honduras implemented a security tax in 2012 that has raised over $260 million.80 The tax relies largely upon bank and other financial transactions, and the Honduran government used it to fund two new security organizations. While the funds are designated for the prevention of violence, citizens have complained that the spending has not been transparent or effective. According to the government’s official

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