The Political Economy of Taxation in Latin America

Abstract

While Latin America has augmented its tax effort significantly since 2000, tax revenues remain below the global norm given the region’s income per capita. Indirect taxes constitute a disproportionate portion of overall revenues, a manifestation of the political and technical difficulties inherent to taxing Latin American elites. Several structural factors characterizing the region hamper revenue collection, including mediocre economic performance, a large informal sector, high income inequality, the rentier status of some economies, and weak state infrastructural power, alongside feeble tax administration agencies, among other factors. Political scientists have deployed three main paradigms for understanding tax policy outcomes and tax reform: interest-based, ideational, and institutional accounts. Interest-based accounts, centered on the political power and resources that interest groups can wield, provide a useful first approximation to understanding tax outcomes; nevertheless, this theoretical lens under-predicts the prevalence of observed tax reform in Latin America. The ideational lens is indispensable to account for the overall contours of the taxation system in the region, because tax reform was informed by the neoliberal paradigm. In recent years, moderately progressive tax policy changes have been enacted by left- and right-wing governments alike, reflecting the increasing centrality of addressing inequality (the vertical equity objective) in the realm of ideas. Democracy, qua a system of institutions geared to enhance the public interest, has not spawned the taxation systems that the median-voter theory predicts in the context of high societal inequality, however. Democracy has not fulfilled the taxation and fiscal policy expectations placed upon it. Nonetheless, structural factors may yet produce a salutary fiscal result. The recent increase in the size of the region’s middle class has translated into greater societal pressures to enhance the quality and quantity of public services, which may portend the development of a more encompassing state–society fiscal pact.