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José Fernando López Headshot

Banana Republic?

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As a result of the letter written by Warren Buffet, in which he asked US legislators to stop pampering the rich so much and make them pay more taxes -- a petition that found acceptance in countries like Italy and France, BBC Mundo published an article titled "¿Pagarían más impuestos los ricos latinoamericanos?" ("Will rich Latin-Americans pay more taxes?") As the question is stated, the answer would be obvious: no. Even though they possess one of the worst income distributions in the world, according to a recent study by Inter-American Dialogue, rich Latin Americans are not very generous in tax matters.

Mexico, which has the "honor" of having the richest man in the world among its citizens, operates with the paradox of paying one of the lowest percentages of income tax in the world (thanks, in part, to the fact that the country milks PEMEX yearly and with its produce covers most of its needs). According to the article, rich Latin Americans believe that they already pay enough taxes and that they state the weakness of the institutions, reflected in waste and corruption, and the inefficiency of public spending, which has not resulted in a better life quality for the population, as reasons for why they need not pay more.

BBC Mundo's article brings to my mind an editorial work about the growing inequality in United States written by Nicholas Kristof of The New York Times, titled "Our Banana Republic." "The richest 1 percent of Americans now take home almost 24 of income, up from 9 percent in 1976. As Timothy Noah of Slate noted in an excellent series on inequality, The United States now arguably has a more unequal distribution of wealth than traditional banana republics like Nicaragua, Venezuela and Guyana," says Mr. Kristof

Rich Americans refuse to pay more using similar arguments than rich Latin Americans. By covering their privileges with ideology -- and counting on the growing support of politicians financed by them -- they insist on stating that a raise in taxes would negatively affect the economic recovery and the creation of jobs. And they do so even when contrary evidence is presented: "Back in the 1980s and 1990s, tax rates for the rich were far higher," says Mr. Buffett in his letter, "and I would note that a net of nearly 40 million jobs were added between 1980 and 2000. You know what's happened since then: lower tax rates and far lower job creation."

Noah recognizes that taxes have not been the fundamental reason for the growth of inequality that has flourished in the United States during these last years -- "The Grate Divergence" as coined by Paul Krugman -- nor have other factors such as race, gender and immigration which are as often declared culprits of the relative impoverishment of a great part of the population. He gives more weight to such factors as the decadence of the unions, Wall Street's corporate board's pampering of the Stinking Rich ("people whose average annual income is about $ 7 million; more of them likely work in finance, a sector of the U.S. economy that saw its share of corporate profits rise from less than 10 percent in 1979 to more than 40 percent in the aughts..."), and the deficiencies of the education system.

But the truth is, as Kristof recalls, "From 1980 to 2005, more than four-fifths of the total increase in American incomes went to the richest 1 percent." And that, as he himself says (although we Latins have never liked the idiom), the United States "has reached a banana republic point, where our inequality has become both economically unhealthy and morally repugnant."

Taxes are not the cause of inequality, but they may help attenuate it, which should be one of the objectives of economic politics. Furthermore, Inequality, apart from being something highly immoral, is not the only problem. In the medium term, the stability of the dollar and the permanence of the United States as the biggest world power are also at stake due to growing public doubt. But the solution does not lie in ending the social gains obtained during the last century.

In midst of the crisis, the European countries have understood that in addition to having a common currency and a common currency policy, they need to have a common fiscal policy, and independent of any differences they may have among themselves it is very possible that they will do it, even in raising the taxes for their rich. It is election time in United States and the issue is a difficult one, given the growing popularity that the Tea Party has achieved. But the issue is fundamental so that no one can say that United States is a Banana Republic.