Financial Inclusion and the Middle of the Pyramid, a New Public Revenue Strategy for the Twenty-First Century

Abstract

This chapter begins with a recognition that developing economies collect less in tax revenue than developed economies, and this presents obstacles to economic and political modernization. Low tax revenue is a chronic problem in Latin America, where regional tax-to-GDP lags behind the OECD average—in 2016, the gap stood at 22.7–34.3% (OECD 2018). Low tax revenue stunts industrialization, causes de-industrialization, worsens commodity dependency, undermines public infrastructure, retards educational and health systems, encourages high poverty, inequality and crime, and ensures periodic economic crises. Recent decades saw a shift in public finances to dependency on Value Added Tax (VAT) revenue: in 2016, VAT accounted for 29.3% of Latin American tax revenue, the region’s largest revenue stream, more than personal income, corporate, trade or property taxes (OECD 2018). This chapter explores why this shift occurred, constraints on VAT collection linked to sizable informal or shadow (“non-taxed”) economies, and how government policies in the area of financial inclusion together with consumer behavioral shifts can improve VAT evasion rates in the future.