Death and Taxes in Central America

By Andrew Wainer, Director of Policy Research at Save the Children U.S.

The Panama Papers revealed global elites’ maneuvering wealth around – and through – a porous international tax infrastructure. While international tax malfeasance is not always strictly illegal, it also isn’t necessarily victimless, particularly in the developing world.

The impact of tax avoidance is particularly stark in the Northern Triangle – Guatemala, Honduras, and El Salvador – where regressive taxation and the lack of the rule-of-law are grimly intertwined.

Global Financial Integrity (GFI) estimates that illicit financial flows (IFFs) – international, illegal movements of money – cost developing nations $1.1 trillion in 2013. According to GFI, these cash outflows from the developing world, “Have a terrible, subversive impact on governments, victims of crime, and society.”

Latin America remains the most unequal region in the world and the Northern Triangle is notoriously poor at taxing and spending equitably. While some Latin American nations employed progressive taxation to reduce income inequality during the 2000s, regressive tax policy in Central America exacerbated its already severe inequality.

In recent years, Guatemala had the lowest (12%) tax-to-GDP-ratio of any country in Latin America and Honduras and El Salvador were only slightly better. By comparison, Brazil’s tax-to-GDP rate was 36% and Denmark’s was 48%.

“The World’s Epicenter for Extortion”

In addition to regressive tax structures, Central America is also plagued by some of the world’s highest crime rates, including extortion. InSight Crime, an organization that analyzes organized crime in Latin America, calls the Northern Triangle, “The world’s epicenter for extortion.”

And poor communities are disproportionately its victims. According to, La Prensa newspaper Salvadorans pay $400 million annually in extortion, Hondurans pay $200 million, and Guatemalans pay $61 million.

Poor Central Americans caught in the middle of formal, legal tax structures that privilege the rich and illegal practices that target the poor. Small businesses are typically more vulnerable to extortion because they often can’t pay for private security services. El Salvador’s small business association states that small business owners pay $30 million per month and that 10 small business close each month due to extortion.

But the economic impact of extortion is comparatively mild compared to the violence that surrounds it. Poor Central Americans can risk their lives if they refuse to pay the region’s gangs: La Prensa states that more than 300 bus drivers were killed in recent years due to extortion.

Taxation Critical to the Citizen-State Compact

Strengthening the citizen-state compact and the rule of law will take years, but in recent months there have been promising initial steps – within Northern Triangle itself and with U.S. assistance to the region – toward redirecting the tax system to the benefit the region’s most vulnerable citizens:

 

  • The “Plan of the Alliance for Prosperity in the Northern Triangle” – developed by the Northern Triangle nations with the support of the United States – includes strengthening financial management as one of the plan’s four pillars. It states, “Public spending must be transparent, efficient and effective.”

 

  • In 2015, the Millennium Challenge Corporation signed a $28 million agreement with the government of Guatemala to, “Support efforts to increase revenues and reduce opportunities for corruption in tax and customs administration.”

The emphasis on the fair collection and spending of public revenues is crucial to strengthening the rule-of-law and reducing the violence that has driven tens of thousands of children from the Northern Triangle. Given the myriad socioeconomic challenges facing the region and the resources needed to address them, the growing focus of US foreign assistance on strengthening tax systems is timely and encouraging.

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