Fiscal urgency in Panama: a call to restructure the tax system

The pressure on Panama's public finances has increased considerably, which makes a deep and urgent revision of the national tax system necessary. José Galíndez, owner of gmtaxadvisors.com, points out that the recent reform of the Social Security Fund (CSS), which will oblige the Executive to transfer $966 million in 2025, adds to the restrictions established by the Fiscal Responsibility Law. This combination generates important challenges to achieve the projected fiscal deficit of 4.4% of the Gross Domestic Product (GDP) for the current fiscal year.

Galíndez warns that failure to comply with the fiscal rule in 2025 could trigger serious consequences, including the possible loss of investment grade by rating agencies such as Moody's and Standard & Poor's. This risk highlights the structural problems of tax revenues and their effect on the fiscal balance, underscoring the urgent need for a comprehensive reform of Panama's tax system.

The 2024 Non-Financial Public Sector Balance (NFPS) also reflects this urgency, with tax revenues reaching $5,786 million, showing an imbalance equivalent to -7.4 % of GDP with respect to compliance with the fiscal rule. According to Galíndez, this deficit makes it essential to increase tax collection in order to finance the ambitious Public Investment Plan contemplated in the Government's Strategic Plan.

A comparative analysis of the regional panorama reinforces the seriousness of the challenge. According to the OECD's Report on Tax Statistics in Latin America and the Caribbean 2024, Panama's tax revenues averaged 8.4% of GDP over the last five years, which is significantly lower than the weighted average for the region. This gap is mainly attributed to high tax expenditures and tax evasion.

To reverse this situation, José Galíndez emphasizes the need to redesign the tax structure. In line with Dr. César García Novoa, an effective tax system goes beyond the mere accumulation of taxes, requiring an “internal logic inspired by tax justice”. This approach is key to broadening the tax base and strengthening the country's fiscal architecture.

On the other hand, the Mirrlees report, “Reforming the Tax System for the 21st Century,” proposes implementing “rationality in taxation” through the “Tax by Design” methodology, establishing the characteristics of an ideal tax system. While recognizing the possibility of theorizing about an optimal tax system, this analysis stresses that each State must retain the freedom to agree on the fair distribution of the tax burden.

According to Galíndez, promoting a national consensus for tax reform is not only urgent because of the current insufficiency of revenues for state functioning, but also because of the global context marked by de-globalization. This makes it necessary to review the adoption of international fiscal standards promoted by organizations such as the OECD, the International Monetary Fund and the World Bank, seeking to protect public finances and overcome traditional schemes.

Rethinking the tax system in Panama, concludes José Galíndez, constitutes a crucial opportunity to lay the foundations for sustainable economic growth. The fiscal crossroads has just begun, and success will depend on the ability of national actors to reach agreements that benefit all of Panamanian society.

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