Creating a Fair Tax System to Benefit Paraguay's Small-Scale Farmers

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This paper aims to contribute to a constructive and deep debate on how to increase equality and justice in Paraguay’s taxation system. To this end, it submits a proposal for debate: to increase tax revenues through a temporary tax on the export of soybeans together with other revenue measures (e.g. improving tax revenues on land, implementing a robust Personal Income Tax, more effectively combating tax evasion, rationalizing tax exemptions, eradicating unfair subsidies, revising in depth the social security system, etc.). It also proposes the adoption of actions to increase the effectiveness of public expenditure
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    Oxfam Discussion Papers Creating a fair tax system to benefit Paraguay’s small scale farmers Déborah Itriago Oxfam Oxfam Discussion Papers Oxfam Discussion Papers are written to contribute to public debate and to invite feedback on development and humanitarian policy issues. They are ’work in progress’ documents, and do not necessarily constitute final publications or reflect Oxfam policy positions. The views and recommendations expressed are those of the author and not necessarily those of Oxfam. www.oxfam.org/grow    CONTENTS Executive Summary ........................................................................................................ 3 1. Introduction .......................................................................................................... 5 2. Policy environment that favours big business over small-scale farmers .............. 6 3. How does tax injustice affect the agricultural sector and other vulnerable sectors? ........................................................................................................................ 12 4. A proposal for discussion ................................................................................... 18 5. Some obstacles to overcome ............................................................................. 23 Bibliography .................................................................................................................. 32 Notes ............................................................................................................................ 34      EXECUTIVE SUMMARY Paraguay has a dual agricultural model, similar to much of Latin America over the past three decades. Two sectors coexist in the country; the first is organized around smallholding, family-based agriculture with a maximum extent of 20 hectares, which gives priority to food security crops and sells on local markets. The other is a very dynamic sector specializing in soybeans and, to a lesser extent, soybean derivatives. It is strongly oriented to satisfying international demand, which represents more than 35% of Paraguay’s agropastoral exports on average, and over 64% of exports from the agricultural sector, and uses most of the country’s productive resources such as land and capital. The imbalance between these two agricultural sectors is seen as a significant obstacle that prevents Paraguay from achieving its social goals. The survival of family farming, in the context of an exclusive export growth, is also threatened by a lack of funding, the regressivity of the tax system and the poor coordination of fiscal policies (taxes and spending) with other key issues relevant to the development of family farming. Soy cultivation has been expanding into areas traditionally occupied by livestock ranching and family-based agriculture. In Alto Paraná, smallholder farmer settlements look like tiny islands in the midst of uniform seas of soy: faced with undercapitalisation and lack of financing, small-scale farmers are often left with no choice but to sell or rent their lands to large-scale soy producers. The displacement of small-scale farmers also means the displacement of other crops, a disincentive to domestic food production and a breeding ground for the deepening legal chaos surrounding property and land tenure. Furthermore, the intensification of soybean production has been accompanied by an increase in complaints filed and cases of people believed to be sick due to the use of agrochemicals in soy production, as well as clear environmental impacts. The Atlantic forest of Alto Paraná covered 8 million hectares of Paraguay’s Eastern Region in 1945; today, only 700,000 hectares are left. This staggering decline is mainly due to soy production. The dynamic agribusiness sector has generated a number of positive contributions in recent decades. However, there is a long way to go before it can adequately compensate the country   and facilitate government actions to neutralize the currently non-virtuous coexistence between soybean and smallholder farmers in Paraguay, and place the development of smallholder agriculture at the heart of policies to reduce poverty and inequality. Brazilian investors in the soybean business have brought in an average of 46% profit annually over the last decade, so it would appear to be a valuable endeavour. However, the direct contribution to the Treasury from soybean producers through the IMAGRO (the tax on income derived from agricultural activity) today amounts to less than 0.5% of total tax revenues; land tax intake is almost nonexistent and there is no personal income tax. Over 70% of government revenue comes from indirect taxes on consumption; exemptions and subsidies have a doubtful social impact. Meanwhile, programmes and projects related to family farming only represent 5% of public expenditure. In 2008, only 12.4% of estates smaller than 20 hectares received technical assistance, and only 15% of producers with farms smaller than 20 hectares had access to credit. Inequality in land ownership in Paraguay is the worst in the world, and there is significant displacement of people living in poverty to cities with no prospect of productive and decent employment. Furthermore, the limited environmental regulation of soybean production threatens the livelihoods and ecosystems of smallholder farmers who strive to provide food for their families and, if possible, beyond. This report presents a proposal for redistribution, based on increased tax receipts from agribusiness and others that aims for greater fairness in Paraguay’s tax system. This proposal is based on two main pillars: a) collecting more through a more progressive and fairer tax    system, and b) making public spending “productive”. Suggested methods for increasing revenue include a temporary tax on the export of soybeans; the final implementation of a strong personal income tax; fighting tax evasion and overcoming the loopholes and shortcomings that limit tax collection; as well as rationalizing tax exemptions, eliminating unfair subsidies and revising the social security system. The limited effect of direct taxes, the loopholes that allow tax evasion, and the lack of a redistributive effect of Paraguay’s tax system are not random consequences. The   technical obstacles to a fairer tax system are not insurmountable, but the existing situation is the product of internal political factors interacting with economic factors based on the international context and with certain cultural components. This report also proposes taking into consideration further measures to deal with non-technical limitations restricting the development of a more egalitarian society in Paraguay: the concentration of economic and political power, the weak tax culture and the poor transparency of the public apparatus towards citizens. In Paraguay, there are three main elements that might be playing a role in opposing redistributive tax reforms. First, a dynamic economic sector that is concentrated in the hands of a few powerful foreign companies and large landowners. Second, a political process that often leads to decisions protecting the interests of a few to the detriment of the many. Third, the limited power of civil society – itself partly a product of the first two factors – means that citizens are unable to make demands to politicians and therefore do not have a say on public policy. Unfortunately, all attempts to increase taxes on agribusiness, assign more resources to institutions working for agrarian reform, and/or provide greater support for family-based agriculture (such as stronger environmental regulation in the soy production process) have hitherto been partially or completely blocked by Congress. On many occasions, public opinion has been tainted due to debate in media lacking journalistic rigour. There is a lingering widespread perception that Congress, with its direct and indirect links to agribusiness, has acted as an ally of large producers and exporters: minimising the sector’s tax contributions, limiting its responsibility in environmental matters, deepening inequalities in land ownership or the displacement of smallholder farmers from their traditional lands, as well as limiting the political and technical resources needed for agricultural reform.
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