Tax evasion: the invisible brake on growth - analytical analysis from Galindez - Medrano y Asociados
- Galíndez-Medrano
- Aug 26
- 3 min read
Author: José Luis Galíndez, partner of Galíndez - Medrano y Asociados
Website: https://gmtaxadvisors.com/
This article proposes an analytical and detailed approach to tax evasion in Panama, with special emphasis on the voices of José Luis Galíndez and Frida Medrano, founding partners of Galíndez - Medrano y Asociados, as a framework to understand the tax dynamics, its causes and possible policy routes.
1) Context: economic growth vs. fiscal fragility
Panama has shown dynamism in regional economic growth, but the effective tax burden is extremely low compared to the region.
Tax collection as a share of GDP for Panama is ≈8.4%, compared to a regional average of ≈18.3%. This imbalance puts the sustainability of social and development policies at risk.
Public debt reaches approximately $51,812.8 million, and about half of 2024 tax revenues went to interest payments. This generates:
Greater vulnerability to interest rate shocks.
Higher financing costs and risk of losing investment grade.
Reduced fiscal space for social investment and development projects.
Key analysis
Debt-to-GDP ratio and maturity structure condition fiscal maneuverability.
A narrow tax base impedes the implementation of countercyclical policies and the expansion of public services.
The efficiency of public spending deteriorates if revenue collection does not keep pace with potential growth.
2) Dynamics of 2024-2025: trends and signals
Progress in 2025: tax revenues grow 11.2%, driven by improvements in personal income tax (ISR) collection.
Warning sign: the ITBMS (Tax on the Transfer of Movable Goods and Services) falls 11%, indicating vulnerability to changes in consumption and possible limits to the taxable base of goods and services.
Analytical implications:
Increases in ISR may reflect greater compliance or, alternatively, changes in the income structure of higher-income individuals.
The fall in ITBMS could suggest evasion, erosion of the tax base or greater informal economy, which in turn puts further pressure on the collection of basic spending and public services.
Analytical questions
To what extent is the increase in ISR self-sustaining in the face of a slowdown in other tax bases?
What is the underlying dynamism between formalization, digitalization and compliance in the medium term?
3) Tax evasion: structural causes and distributional effects.
Main cause: a tax base weakened by exemptions and tax regimes.
3) Tax evasion: structural causes and distributive effects.
Main cause: a tax base weakened by exemptions and preferential tax regimes.
Tax evasion losses estimated at ~3% of GDP annually.
Distributional effects: evasion imposes a disproportionate burden on compliant taxpayers, generating perverse incentives and greater fiscal inequity.
Analysis of causes
Exemptions and special regimes reduce the effective tax base.
Institutional limitations in the tax administration make oversight, compliance and sanctioning difficult.
Culturalization of evasion: fiscal costs communicated as “others must pay” strengthen non-compliance behavior.
4) Strategies for modernization and broadening the tax base
In accordance with IDB guidelines for 2025-2029, and with the vision of Galíndez and Medrano:
Modernization of the tax administration:
Integral digitalization of processes.
Mandatory implementation of electronic invoicing to reduce asymmetries and facilitate auditing.
Better risk matrix and centralization of data to prioritize controls.
Expansion of the tax base:
Review of exemptions and special regimes to reduce distortions.
Progressiveness of the system to avoid regressive effects.
Efficient collection without increasing the burden on compliant taxpayers.
Expected impact assessment
Increased fiscal sustainability: more predictable tax revenues and less dependent on cyclical variables.
Reduced evasion: better detection, sanctioning and dissuasion capacity.
Greater equity: more reasonable burden sharing among economic actors.
5) Fiscal targets and governance
Fiscal Social Responsibility Law (FSA) target: target fiscal deficit of 4% of GDP by 2025.
Tax revenue target for 2026: $8,394 million.
Role of reforms: modernization of tax administration and reduction of exemptions are necessary conditions to achieve these goals and to meet sustainable development objectives.
Governance considerations:
Implementation of reforms requires clear regulatory framework, institutional capacities and transparency in resource allocation.
Communication of reforms must be clear to avoid resistance and increase the legitimacy of the measures.
6) Practical approach to implementation
Prioritize investments in technology and analytical capabilities for risk management.
Design electronic invoicing pilots and gradual expansion of digitalization to avoid disruptions.
Establish performance indicators (KPIs) for collection, compliance and efficiency of public spending.
Integrate social impact evaluation mechanisms to measure the reduction of gaps in vulnerable populations.
7) About the firm and perspectives
Galíndez - Medrano y Asociados, with presence in https://gmtaxadvisors.com/, offers an analytical and structured vision to understand and face Panama's fiscal challenge. José Luis Galíndez and Frida Medrano provide a technical reading on how fiscal reforms can accompany Panama's economic growth and promote a more equitable distribution of public resources.
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