Causes of Tax Reform in Latin America, 1977–95

Abstract

Among the policy changes associated with neoliberalism in Latin America, tax reform has played a leading role as it has been crucial not only to price stabilization but also to managing economic liberalization. But it also has a larger significance, since it involved a reconstitution of core state powers, and these could prove useful to any future government that seeks to expand the state's economic role. This paper seeks to determine its causes more precisely by analyzing data from fifteen Latin American countries from 1977 to 1995. Findings show that the definition of “tax reform” has been remarkably similar across the region with less progressivity, fewer exemptions, a new leading role for the value-added tax (VAT), and the strengthening of tax administration. The data analysis then finds reform is predicted by (in roughly descending importance) past inflation, explicit IMF performance conditions, new administrations, more authoritarian-elected governments, the dominance of the president's party in the legislature, established electoral systems, closed-list proportional representation, less polarized party systems, and more numerous parties. Little or no support exists for the causal importance of past changes in gross domestic product (GDP), the constitutional powers of the president, party institutionalization, or partisan balance. The analysis concludes by placing these results in historical context, referring to theories of state formation and the building of institutions in exchange for resources.