TAX CUTS KEY TO LATIN GROWTH, DEBT SOLUTION, ECONOMIST SAYS

TAX CUTS KEY TO LATIN GROWTH, DEBT SOLUTION, ECONOMIST SAYS

Marginal tax reductions are the key to stimulating growth in Latin American countries and providing a solution to the debt crisis, according to economist Alan Reynolds.

In most Latin American countries, marginal tax rates reach 60 percent to 95 percent, a level that leads to capital flight and rampant underground economic activity. In turn, this activity reduces government tax revenues, causes currency devaluation, and constrains economic growth.The issue of Latin American debt is really very simple, Mr. Reynolds wrote. Economies cannot grow with confiscatory taxes and sinking currencies.

Mr. Reynolds, who is chief economist with Polyconomics Inc. in Morristown, N.J., notes that the Baker Plan, which called for a shift toward growth- oriented strategies for Latin America provided some hope when it was first proposed. However, the plan floundered because neither policy-makers nor bankers offered a strong means to promote growth.

One of the biggest obstacles to solving the debt crisis, Mr. Reynolds asserted, has been the never questioned assumption that debtor nations have to run a huge trade surplus to service their debts. In order to achieve a trade surplus, the countries usually erect tariffs to discourage imports, subsidize exports and devalue their currencies.

However, Mr. Reynolds argues that import barriers and an unstable currency discourages foreign and domestic investment, making it much more difficult for nations to service their debt.

Slashing the formidable import barriers in any Latin American country would attract capital, because it makes the labor, capital and materials now wasted in protected industries available to competitive entrepreneurs, Mr. Reynolds wrote.

Moreover, Mr. Reynolds continued, Sound, stable currencies also attract capital. The only reason the LDCs have to export to acquire 'hard currencies' is that their currencies are not hard.

In essence, to raise the creditworthiness of Latin American nations, Mr. Reynolds posited, real tax revenues have to grow and prospects for economic growth have to improve.

Most Latin American nations, Mr. Reynolds noted, collect less than 1 percent of their gross domestic product from personal income taxes - compared with 12 percent in industrialized nations - even though marginal tax rates are generally much higher in Latin American nations.

As an example, Mr. Reynolds cites a country where personal income makes up 80 percent of GDP. If the poorest half of the population is exempted from paying any income tax at all, then 40 percent of GDP would be taxed. A flat tax rate of 10 percent would yield 4 percent of GDP, Mr. Reynolds calculates, double what Mexico's tax rates of 20 percent to 55 percent now yield.

In the case of Argentina, Brazil, Venezuela and Peru, the immediate, static revenue increase from a 10 percent flat tax with a generous exemption would amount to virtually the entire 4 percent of GDP, Mr. Reynolds said. Collection of a 10 percent tax would be simple, requiring only an appeal to peoples' sense of fairness and patriotism.

More importantly, Mr. Reynolds said, the tax rate reductions would encourage entrepreneurship.

Mexico would have to put up border guards to keep expatriate Mexicans (and Americans) from rushing back into the country with their skills, and satchels of money, Mr. Reynolds claimed.

Countries that have cut their tax rates in recent years - Mr. Reynolds cites Turkey, Jamaica, Bolivia and Columbia - have grown faster than other less-developed nations.

No country in history, Mr. Reynolds asserts, has ever managed to ascend

from a less developed to developed status with the kind of tax rates on modest incomes that are now typical in other Latin American and African nations.