Financial Inclusion and Value-Added Taxes in Argentina, Brazil and Chile

Abstract

This chapter shows how government financial inclusion policies increased bank participation rates in Argentina, Brazil and Chile, and this in turn increased access to (and use of) debt and credit cards. In Argentina and Chile in particular, financial inclusion along with card-based consumption grew drastically and is positively correlated with higher value-added tax (VAT) collection. VAT compliance strengthens at intermediate stages (VAT receipt needed to receive a tax benefit) and weakens at final consumption (VAT receipt garners no value to retailers), yet card transactions occur at this final stage. In recent years, we observe an anomaly where VAT revenue has increased despite unchanged VAT rates and stagnant economies, something we link to more formal and less informal final consumption. Fixed-effects regression is used to test the influence of changes in the banked population, card-based consumption and size of the informal economy on VAT revenue from 2002 to 2015.