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By William F. Maloney, Chief Economist, and Guillermo Vuletin, Senior Economist, Latin American and the Caribbean, World Bank
Governments worldwide are confronting tightening fiscal conditions while simultaneously trying to stimulate growth, generate better jobs and meet rising social expectations. These pressures are particularly acute in Latin America and the Caribbean (LAC), a region that entered 2026 with diminishing fiscal space, elevated debt, uncertain trade relations and little momentum for long‑term growth. Local businesses, foreign investors and potential startups face challenges, including skilled-workforce shortages, deteriorating infrastructure, thin financial markets and increasing insecurity. On top of this, they face complex tax systems and heavy tax burdens.
The challenge is to redesign tax systems to minimize disincentives to investment and entrepreneurship, treating growth as an explicit objective of tax design.
Taxation, long viewed mainly through the narrow lenses of raising revenue and promoting fairness, is a key part of the growth equation. A broader analytical perspective is required. A recent World Bank publication, Rethinking Taxation for Growth in Latin America and the Caribbean: Objectives, Behavioral Responses, and Technological Advances, argues that the challenge is to redesign tax systems to minimize disincentives to investment and entrepreneurship, treating growth as an explicit objective of tax design.
Tax structures designed decades ago struggle to keep pace with an economy defined by informality, increased mobility, global supply chains and rapid technological change. For businesses, this landscape translates into unpredictability, high compliance costs and disadvantages relative to informal competitors. Further, equity concerns are often poorly served: High statutory rates coexist with widespread evasion, and apparent progressivity on paper produces uneven taxation in reality.
Corporate taxation: From chasing butterflies to attracting bees
It is essential to explore how to use fiscal policy to support businesses, especially their ability to innovate and grow.
While the rest of the world has steadily reduced corporate income tax (CIT) rates over the past four decades, LAC has lagged, remaining one of the regions with the highest CIT rates globally and showing far less downward adjustment than advanced economies or non-LAC emerging markets.
High corporate tax rates discourage investment in new plants, equipment and technology. They lead entrepreneurs to keep their firms small or informal. They create incentives for profit shifting and tax planning, further reducing the base. And they discourage foreign direct investment (FDI) at a time when global competition for mobile capital is intensifying. Digital enforcement tools, such as e‑invoicing, have helped reduce evasion, but they cannot compensate for statutory rates that are out of step with global norms.
A modern corporate tax system in LAC should therefore view CIT not merely as a fiscal instrument but as a central lever for economic dynamism. More competitive rates would encourage firms to invest, expand and hire. A shift away from heavy reliance on mobile corporate profits toward more stable bases such as consumption and property would allow governments to maintain fiscal space without hindering the entrepreneurial energy that drives job creation.
Seeking resources on other tax fronts
Value-added tax (VAT) brings in about 45 percent of revenue in LAC and is considered quite efficient, but it has often been opposed as too regressive in its impact on income distribution. However, recent research shows that when looking at consumption, rather than income, this regressivity is much smaller. That’s because income is more volatile and poorly measured (especially in the informal sector), while consumption better tracks well-being. Lower-income households also buy more from informal, untaxed markets, thereby cutting their effective VAT burden. So the real problem isn’t VAT itself, but its design: Decades of exemptions and reduced rates have narrowed the base and have acted like subsidies captured mostly by higher-income households, who consume more exempt goods in absolute terms.
Governments often respond with some of the world’s highest VAT rates, often above the level that starts to hurt growth. Evidence suggests that once standard rates exceed roughly 16 percent, they dampen consumption and economic performance. Looking ahead, LAC could move to a simpler VAT with far fewer exemptions and reduced rates. Achieving social goals and protecting low-income households could be addressed through targeted transfers, not the VAT. This approach would boost consumption, cut firms’ compliance costs and create a more predictable investment climate.
Personal income tax (PIT) collections in LAC are low, around 2 percent of gross domestic product (GDP), but the scope to raise much more is constrained. Top rates are already high, and the base is very narrow; often, only the top 10 percent pay, with the top 1 percent providing most of the revenue. Further rate hikes would likely yield little and carry high efficiency costs due to strong behavioral responses, often penalizing the entrepreneurs and innovators the region needs to foster. A better medium-term path would be modest base broadening to increase participation while preserving progressivity.
Wealth taxation is a more promising source of revenue. Calls for taxing large fortunes have grown, but traditional net‑wealth taxes face familiar problems: Mobile financial assets are difficult to track and easy to shift offshore. However, in LAC, high earners’ wealth is mostly in real estate, which is immobile and now easier to value via digital cadasters and georeferenced tools, enabling progressive revenue gains with fewer efficiency losses.
Savings from greater public-spending efficiency
Of course, a complementary agenda to raising revenue is to use available revenue more efficiently. Recent research suggests that LAC governments could save about 4 percent of GDP by reducing high levels of government waste, including inefficient subsidies, duplicative programs and low‑quality procurement, thereby expanding fiscal space without placing additional pressure on taxpayers. Reducing waste offers an important source of fiscal space. More generally, the World Bank’s Government Analytics initiative documents how existing data can be used to better measure and then improve government performance. Greater confidence that state resources are being used well would improve tax morale and reduce evasion.
Toward a new fiscal contract for LAC
This discussion could create a roadmap for a modern fiscal contract in Latin America and the Caribbean. LAC, without question, needs more fiscal space: It faces a host of investment shortfalls in areas essential to productivity and private‑sector development, such as infrastructure, digitalization, skills training and innovation. At the same time, it must avoid the discouraging impacts of taxation falling primarily on precisely the entrepreneurs and investors who drive growth. As such, this is not a call for either higher taxes or austerity. Rather, it is a call to improve governance and redesign tax systems to align with the region’s economic structure, administrative capabilities and aspirations for development. This implies moving beyond the traditional equity-efficiency trade‑off and building a tax system that adds growth as a third goal—growth that will make LAC better able to support formal employment, stronger institutions, sustainable development and a more dynamic and prosperous future for businesses and citizens alike.
ABOUT THE AUTHORS
William F. Maloney is the Chief Economist for the Latin America and the Caribbean region at the World Bank. Previously, he was the Chief Economist for Equitable Growth, Finance and Institutions and Trade and Competitiveness; he was also the Global Lead on Innovation and Productivity. Prior to the World Bank, he was an Assistant Professor of Economics at the University of Illinois at Urbana-Champaign.
Guillermo Vuletin is a Senior Economist in the Office of the Chief Economist for Latin America and the Caribbean of the World Bank. He is also an Associate Editor of Economía LACEA Journal of the Latin American and Caribbean Economic Association (LACEA). Prior to joining the World Bank, he was a Lead Economist in the Research Department of the Inter-American Development Bank (IDB).