The most striking feature of fiscal policy in Paraguay, and the best empirical evidence of the limited role of the government in the economy, was the level of government revenues as a percentage of GDP. Revenues in 1986 equalled slightly less than 8 percent of GDP, the lowest rate in Latin America and one of the lowest in the world. Tax revenues represented 87 percent of total revenues in 1986 and came from taxes on goods and services (32 percent), net income and profits of managers and corporations (15 percent), international trade, mainly imports (14 percent), and real estate (11 percent). The remaining 28 percent came from a variety of other sources, including stamp taxes. Paraguay had no personal income tax, state tax, or local taxes. Nontax revenues, which included profits from parastatals, represented the remaining 13 percent of total revenues. Although revenues were greater than expenditures in 1986, there was a small budget deficit as a consequence of certain exchange-rate adjustments.
The tax system was a focus of great concern. Generally outdated, it had become increasingly inefficient through numerous ad hoc additions to the tax code over the years. The tax system, headed by the Income Tax Bureau, also was difficult to administer, suffered from low collection rates, and was organizationally complex. For example, the system comprised four autonomous collection agencies whose boundaries were not always clear. Another of the system's fundamental drawbacks was its lack of practical taxes, such as a personal income tax, through which the government could systematically capture tax revenues. More important, the lack of tax revenues limited the government's ability to undertake public works and provide social services. Paraguay was perhaps the only country in Latin America whose government received encouragement from the major multilateral lenders--the IMF, the World Bank (see Glossary), and the IDB--to increase its taxes. As part of the 1986 Adjustment Plan, the government proposed a progressive personal income tax, a value-added tax, and some administrative reshuffling of the tax administration. In 1988, however, it was still unclear whether these policies would be enacted or had been proposed merely for political effect.
Data as of December 1988