The recent report "Tax Statistics in Latin America and the Caribbean 2024" by the Inter-American Development Bank (IDB) has highlighted a worrisome reality in Panama. The country's tax collection stands at only 13.1% of gross domestic product (GDP), well below the regional average of 21.5% for 26 countries in Latin America and the Caribbean. This low performance is further aggravated by persistent tax evasion, which according to the IDB, represents a loss of more than 4% of GDP.
When analyzing the Panamanian tax structure, the report notes that it is mainly composed of social security contributions (42%), Income Tax (28%), Transfer Tax on Movable Goods and Services (ITBMS) (14%) and other taxes (16%). In addition, it is noted that the equivalent tax burden (EFP) has decreased in Panama, along with Trinidad and Tobago, by 2.4%, while most countries in the region have experienced an increase.
Two key factors explain this poor collection performance: excessive tax exemptions and high levels of tax evasion. On the one hand, the multiple exemptions granted to certain economic sectors have negatively impacted tax revenues, limiting public spending capacity. These tax benefits are not sustainable indefinitely, so a rigorous review of these exemptions in the short and medium term is crucial.
On the other hand, James Buchanan's "Public Choice Theory" argues that tax systems with multiple exemptions, especially for non-vulnerable groups, contradict the search for a fair and inclusive tax system. Reports by the International Monetary Fund (IMF) and the IDB suggest that the Panamanian tax system resembles what is described by this theory, with the proliferation of exemptions and preferential tax regimes that erode the collection of the National Treasury.
In addition to exemptions, tax evasion represents another major obstacle to fiscal consolidation in Panama. Given the unsustainability of public indebtedness and the need to strengthen public finances, it is imperative to implement a plan to strengthen the General Revenue Directorate. Raising tax collection in relation to GDP requires a good fiscal governance strategy focused on reducing tax evasion and broadening the tax base.
To design an optimal tax system for Panama, tax expert Bruno Gangemi recommends having an efficient tax administration that allows for the elimination of evasion and the limitation of exemptions; the coordination and progressiveness of direct taxes; the simplification of indirect taxes; legal tax certainty through a solid Tax Code; and the consideration of the taxpayer as a single entity with an integral contributive capacity.
In summary, the economic growth experienced in Panama in recent years has not translated into increased tax collection. To reverse this situation and ensure fiscal sustainability, a paradigm shift is required. It is necessary to act differently, addressing the challenges of excessive exemptions and tax evasion, in order to obtain different results and strengthen the country's tax collection capacity.
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