State Building and Taxation in Latin America

Abstract

State Building and Taxation in Latin America Heidi Jane M. Smith Mobilizing Resources in Latin America: The Political Economy of Tax Reform in Chile and Argentina. By Omar Sánchez. New York: Palgrave Macmillan, 2011. Pp. xi + 245. $85.00 cloth. ISBN: 9780230114463. Taxation and Society in Twentieth-Century Argentina. By José Antonio Sánchez Román. New York: Palgrave Macmillan, 2012. Pp. xiv + 245. $90.00 cloth. ISBN: 9780230341265. State-Building and Tax Regimes in Central America. By Aaron Schneider. New York: Cambridge University Press, 2012. Pp. xvi + 243. $90.00 cloth. ISBN: 9781107019096. Taxing and spending are two main functions of a modern government, and citizens’ opinions on how they are taxed matter for creating an effective state apparatus. This is particularly true in Latin America, where states are considered to be weak and tax-to-GDP ratios are relatively low. While many scholars have studied the link between state formation and society through the lenses of fiscal sociology and tax policy, mainly in continental Europe and the United States, social scientists are only now beginning to evaluate this phenomenon in developing countries by using an institutionalist approach.1 Latin America has one of the world’s lowest tax rates per capita, and many people outright do not pay their share. The Inter-American Development Bank (IDB) reports that tax revenues, excluding social contributions, were on average about 17 percent of gross domestic product (GDP) compared to over 30 percent in more developed economies.2 The IDB notes that tax revenues from capital income and direct taxation (including income tax) are also low. In many countries, capital income is hardly taxed at all, and deductions are very high with many loopholes encouraging elites to evade paying.3 In Latin America the problems are exacerbated where highly regressive tax systems exist side by side with highly unequal income distribution. [End Page 256] Notably, there are very large discrepancies in tax burdens across countries and within states (at the subnational level). They range from the low burdens of countries endowed with nonrenewable resources like Mexico and Venezuela (about 10 percent of GDP), to high levels in countries like Brazil (36 percent of GDP).4 Brazil’s tax-to-GDP ratio is close to the Organization of Economic Cooperation and Development (OECD) average, but in some countries, such as Peru, Guatemala, and Haiti, government revenue is much lower, ranging between 10 and 20 percent of GDP. This reflects the inability of the government to bring more dynamic sectors of the economy into the tax net. State-society relations matter for how taxation systems are established within a country. To explore this ground, three scholars recently have published inquiries about the nature of civil society’s fiscal interaction with the state by evaluating how Latin American tax systems were built. Coming to the question from the disciplinary perspectives of history and political science rather than the well-worn paths of sociology and economics, the works adopt an institutionalist approach. They include an in-depth single case study, a classic two-country comparison, and a multicountry study. While the first two treat the more developed countries of the Southern Cone, the third examines less-developed Central America. Mobilizing Resources in Latin America: The Political Economy of Tax Reform in Chile and Argentina, by Omar Sánchez, suggests that while Argentina has failed to produce an appropriate social contract upon which to build fiscal legitimacy, Chile has been successful not only in collecting taxes but also in achieving impressive economic growth and macroeconomic stability sustained for decades. For Sánchez, the typical economic and rational-choice theories used to evaluate tax policy through the lenses of efficiency and effectiveness do not necessarily help us understand why a particular country pursues a specific set of fiscal policies. He evaluates the strengths and weaknesses of institutions by studying the political environment, policy operations, and group interactions that create a particular tax policy. He finds that Argentina constantly changed the rules of the tax game. Middling tax enforcement mechanisms at the national level, weak party systems, and the near absence of organized civil society hindered tax compliance. As a result, an effective state-society pact was never...