The Era Of Wealth Taxation In Latin America

Naturally, behind companies there are individuals and this has caused an exacerbation of the income disparities between the rich and the poor in Latin America. In Argentina, with one of the strongest quarantines in the world[i], poverty has increased 20 per cent to a staggering 40.50 per cent of the population and 58.6 per cent between children and teenagers, according to the statistics bureau of Argentina (INDEC) and UNICEF[ii].

This increase in poverty and the bigger gap between the rich and poor has led to many countries in Latin America considering the idea of taxation of wealth. The idea of taxing wealth in these extreme times is not new. In the past, the main source of wealth was real estate and the needs of the government were scarce, so taxing the assets was exceptional and  stemmed from random events like wars (these taxes were called “war taxes”).

The Latin American Network for Economic and Social Justice calls for “Wealth Tax Now!” and in its report on “Wealth tax and large fortunes in Latin America and the Caribbean”, they say, it is now or never. In their report[iii] they argue that the pandemic has taken poverty levels to 37 per cent and a drop of 9.1 per cent in GDP for the LatAm Region. This report describes the region as “the most unequal in the world in terms of revenue distribution” with a “very high concentration of wealth and income” and that taxing wealth and income of the groups with higher income is a “pending issue” and “taxing large fortunes should be an important option at the time of financing the costs and recuperation of the pandemic without affecting economic activity”. This report calls attention to how little wealth tax revenue is.  Wealth tax is defined in this report as taxes on land, house, net wealth, inheritance, gifts and financial transactions.

The Case Of Argentina

The case of Argentina is iconic because it is the first Latin American country to tax wealth and, in this regard, it is a negative leader in the region with the highest burden of wealth tax with minimum thresholds of a little bit more than US$15,000 and an aggregate tax on wealth for the larger brackets of 7.5 per cent.

The tax was created in 1991 “for nine fiscal periods” and taxed “personal assets not incorporated to the economic process”, therefore taxing idle assets with the idea that wealth had to have an economic purpose.  The expiration of this tax was due in December 1999 but has been subsequently extended since then.

From 1991 until today, the rates have varied from 0.25 per cent to 1 per cent of the net worth of an individual (with certain allowed deductions and different rates for residents and non-residents for assets in Argentina) depending on political factors and the needs of fiscal revenue from the government.

The recent history of this tax is interesting; in 2016, Argentina offered a large tax amnesty.  In the same law proposing the amnesty, wealth tax was reduced gradually from 0.75 per cent to 0.25 per cent[iv]. With that reduction in the rate of wealth tax, Argentina had the largest amnesty in the world with more than US$116 billion in declared assets.

Two years later in 2018, the rates were increased back to 0.75 per cent and in 2019, the rates were again increased from 0.5 per cent to 2.25 per cent depending on where the assets are located and on whether assets held overseas would be “repatriated”.

With this background, early in the pandemic – April 2020 – the government  considered  the idea of a “one off solidary special contribution” from the super wealthy (assets of more than US$3 million). In December 2020, the “extraordinary and solidary contribution to mitigate the effects of the pandemic” was approved (finally because of inflation, the threshold is US$2.4 million).  The government is very careful not to call it a tax because if it were a tax, it would be identical to the wealth tax already in force; the government calls it a “contribution” as if it were somewhat voluntary but section 1 of the law that creates this “contribution” clarifies that the “contribution” is mandatory.

The rates for this “contribution” range from 2 per cent to 5.25 per cent, similarly as with the wealth tax depending on where the assets are located and on whether assets held overseas would be “repatriated” so, in the worst case, a taxpayer would be subject to a 7.5 per cent tax on her or his wealth for fiscal year 2020. In a world of negative rates, taxpayers are forced to seek risk to at least cover this tax. At these rates, if someone has US$100, in 20 years they would only have US$22. That is the cost of being solidary. Of course, a proper solidarity is always developed with someone else’s pocket and not those of the politicians whose salaries and perks have not been reduced, even in the worst of the pandemic.

As of end March, several taxpayers (which in Spanish are called “contribuyentes” as if they were voluntarily paying taxes) have contested this law and at least in two cases, judges have granted interim measures ordering the tax authorities to refrain from collecting this “contribution”.  I have not mentioned the specific cases on purpose as they have been on the news in Argentina with the risk to these taxpayers and their families’ personal security.

Other Latin American Countries: Is Wealth Tax Inevitable?

Argentina as mentioned, has imposed a wealth tax since 1991 and, more importantly, has many other taxes (137 in total) that fall under the definition of wealth tax of the Latin American Network for Economic and Social Justice report “Wealth tax and large fortunes in Latin America and the Caribbean”.  In this report “wealth tax” is defined as taxes on land, house, net wealth, inheritance, gifts and financial transactions.  Argentina has other taxes on “bank debits and credits”, “land”, and “inheritance”, in the largest province of Buenos Aires. Remember also that the minimum threshold in Argentina to be subject to wealth tax is – depending on the exchange rate – approximately US$15,000.

Uruguay already has a wealth tax for net worth of more than US$100,000 and excludes assets held overseas. Colombia has a tax on wealth for net worth of more than US$1,300,000.

Chile’s left-wing opposition proposed a similar tax as the Argentine “contribution” – a one-off tax on the “super-rich” of 2.5 per cent for fortunes over US$22 million but the initiative did not obtain enough support.

Bolivia’s new socialist government has recently announced it will impose a wealth tax.  It will only affect 152 people with assets worth more than US$4 million.

In Brazil, these proposals have been blocked in Congress despite a tax on large fortunes being written into the 1988 Constitution. The law was never approved for fear of a capital flight.

All this is coming, mostly, from Thomas Piketty’s book “Capital in the Twenty-First Century”[v] (a book a lot of people have bought but few people have read, in my opinion), where he proposes a wealth tax to terminate inequality.

Now, in a context where even the most arbitrary measures are justified because of the pandemic (in Argentina we were not allowed to leave our homes for 283 days); slowly but steadily all the civil liberties that took ages to gain are vanishing under a sanitary excuse of a virus whose mortality is, at least, questionable. Bear in mind that those affected by wealth taxes constitute a minority that will not burn tyres on the streets or riot and one can expect more and more pressure to “redistribute” the “ill-gotten” gains of the wealthy.

It is in this case that we should raise our voice and remember the lessons of Ibn Khaldun[vi]: “When incentive to acquire and obtain property is gone, people no longer make efforts to acquire any... Those who infringe upon property rights commit an injustice... If this occurs repeatedly, all incentives to cultural enterprise are destroyed and they cease utterly to make an effort. This leads to destruction and ruin of civilization.”

Footnotes:

[i] See the lockdown comparison prepared by the Financial Times https://ig.ft.com/coronavirus-lockdowns/

[ii] https://www.unicef.org/argentina/media/8096/file/COVID-19:%20La%20pobreza%20y%20la%20desigualdad%20de%20ni%C3%B1as,%20ni%C3%B1os%20y%20adolescentes%20en%20la%20Argentina..pdf

[iii] http://impuestosalariqueza.org/wp-content/uploads/2020/12/Informe-Impuestos-a-la-Riqueza.pdf

[iv] The initial draft mentioned that the tax would be repelled.

[v] Le Capital au XXIe siècle, published in August 2013; an English translation by Arthur Goldhammer followed in April 2014.

[vi] Abū Zayd ‘Abd ar-Raḥmān ibn Muḥammad ibn Khaldūn al-Ḥaḍramī; 27 May 1332 – 17 March 1406) - Muqaddimah

Javier Canosa
Javier is Partner at Canosa Abogados, specialising in corporate law, tax, tax planning and compliance.