Rethinking Taxation in Latin America

RETHINKING
TAXATION IN
LATIN AMERICA
Reform and Challenges in
Times of Uncertainty
EDITED BY
JORGE ATRIA
CONSTANTIN GROLL
MARIA FERNANDA VALDÉS
Latin American Political Econom

Latin American Political Economy
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Pontificia Universidad Católica de Chile
Macul, Chile
Andreas E. Feldmann
University of Illinois at Chicago
Chicago, Illinois, USA
Rodrigo Mardones Z.
Pontificia Universidad Católica de Chile
Macul, Chile
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Jorge Atria • Constantin Groll
Maria Fernanda Valdés
Editors
Rethinking Taxation
in Latin America
Reform and Challenges in Times of Uncertainty
Editors
Jorge Atria Constantin Groll
Pontificia Universidad Católica Freie Universität Berlin
de Chile Berlin, Germany
Macul, Chile
Maria Fernanda Valdés

Friedrich Ebert Stiftung
Bogota, Colombia
Latin American Political Economy

ISBN 978-3-319-60118-2 ISBN 978-3-319-60119-9 (eBook)
DOI 10.1007/978-3-319-60119-9
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Preface
This volume represents a timely confluence of scholarly currents. Over the

past three decades, historians, sociologists, and political scientists have
come to recognize the importance of taxation in the development of effec-
tive, modern states—not just as a matter of revenue provision, but more
fundamentally by institutionalizing a broad sense of reciprocity between
citizens and states. More recently, scholars of Latin American develop-
ment came to the conclusion that many of the region’s most severe prob-
lems of poverty, inequality, and insecurity could be traced to historically
determine weaknesses in national state administrations. This latter current
grew with the arrival of the neoliberal policy package, which included
major tax reforms. These reforms had a somewhat paradoxical double
effect. They clearly strengthened states in terms of administrative and
revenue-raising capacity; yet, they also confirmed the old pattern of exces-
sive reliance on regressive consumption taxes. Then, after most countries
had begun to buttress their revenue pragmatically with a variety of minor
heterodox taxes, the China-driven resource boom of 2003–2008 brought
back another ancient ill, as many economies shifted back toward primary
product exports, and their tax structures did so too.
The central analytical themes of this book—concerning the relational,
historical, and transnational dimensions of taxation—thus bring to schol-
arship on Latin America the key ideas of a state-building literature, the
archetypes of which date from late medieval and early modern Europe.
The historical aspect is perhaps the most obvious and the contrasts with
Europe most telling, as the book shows us the deep roots of Latin America’s
weak tax administrations and its rickety personal income taxation. The
v
vi Preface
relational aspect is historical, too, of course. In historical Europe, fiscal

pacts served as midwives to liberalism and parliamentarism, but there and
in Latin America, also, they have accreted over time in state structures
and the settled expectations of citizens about their tax obligations and
what they are due in return. But the chapters here indicate to us who is
included in these pacts, implicitly or explicitly, and who is not. Hence,
dominant classes and their organizations have shaped the tax systems of
contemporary Latin America, whereas the dominated (disproportionately
female) get along without tax exemptions and are exposed to the vagaries
of the informal economy. And on the third, transnational dimension, we
find an interesting contrast. In Europe, the exogenous challenge was
interstate war, whereas for Latin America it has been the volatility of the
international economy—which, in its once-reigning and now revived
primary-export mode of global economic articulation, the region has had
to suffer.
The same three themes illuminate the road ahead. On the transnational
dimension, just as belligerent states turned to internal taxation and, even-
tually, the personal income tax to bring in revenue when their wars dis-
rupted trade, so might Latin American states adapt to the volatility of
resource-derived revenue by strengthening income and property taxation.
This would serve an important purpose on the relational dimension too.
Such a move promises to bring tax obligations into line with the benefits
that households, especially the wealthy ones, derive from government—
while giving these same actors an incentive to keep the state healthy and
honest, rather than starving and submissive. And finally, with regard to the
historical dimension, the chapters remind us that while the international
economy and local powers constrain the choice of policies, they do not
absolutely determine it, and the future will differ from the past. For exam-
ple, today when people talk about revenue from primary exports, they
mean capital income or export taxes, not the regressive import tariffs of
the old liberal states.
All of this is to say that there is a lot to recommend in these chapters,
both as explorations of their particular topics and as an ensemble. They also
give us a convenient sampling of the efforts of a group of young scholars
from whom much may be expected in the years to come.
Williams College, Williamstown, MA James E. Mahon Jr.

May 2017
Acknowledgment
The editors are grateful for the financial and organizational support of the
desigualdades.net network at Freie Universität Berlin.
vii
Contents
1 Introduction: Taxation in Times of Uncertainty

in Latin America1
Jorge Atria, Constantin Groll, and Maria Fernanda Valdés
Part I Historical Dimension of Taxation 29
2 Debtor Coalitions and Weak Tax Institutions

in Latin America: Insights from Argentina and Brazil31
Ryan Saylor
3 State Capacity and Development: Federalism

and Tax in Brazil57
Aaron Schneider
Part II Transnational Dimension of Taxation 87
4 Global Uncertainty in the Evolution

of Latin American Income Taxes89
Andrés Biehl and José Tomás Labarca
ix
x Contents
5 International Insertion, Volatility and Fiscal Resources

in Countries Specialized in Extractive Industries:
Between a Rock and a Hard Place?123
Juan Carlos Gómez Sabaini, Osvaldo Kacef,
and Dalmiro Morán
Part III Relational Dimension of Taxation159
6 Gender Bias of Regressive Taxation in Latin America:

Overview and Exploration of the Argentinean Case 161
Corina Rodríguez Enríquez and Nicolás Águila
7 Business Groups, Tax Efficiency, and Regressivity

in Colombia187
Néstor Castañeda
8 Tax Incentives in Latin America:

The Case of Guatemala213
Mauricio Garita
9 Latin American Taxation from a New Perspective:

Contributions from the Relational, Historical,
and Transnational Dimensions235
Jorge Atria, Constantin Groll, and Maria Fernanda Valdés
Index259
List of Contributors
Nicolás Águila is an economist from Universidad de Buenos Aires (UBA).

He is an independent researcher at the Interdisciplinary Centre for the
Study of Public Policy (Ciepp) in Buenos Aires, Argentina. He is also a
teaching assistant for the course gender and economics at UBA. He works
from the feminist economics approach on labor market, economic devel-
opment, financialization, and epistemology issues.
Jorge Atria is a postdoctoral researcher at the Institute of Sociology,
Pontificia Universidad Católica de Chile (Chile), and an adjunct researcher at
the Centre for Social Conflict and Cohesion Studies (COES). He holds a
PhD in sociology from Freie Universität Berlin (Germany). He is the edi-
tor of the book Tributación en Sociedad: Impuestos y Redistribución en el
Chile del Siglo XXI (Santiago de Chile: Uqbar, 2014). His research inter-
ests include inequality, taxation and redistribution, elites, and economic and
fiscal sociology.
Andrés Biehl is Assistant Professor of Sociology at the Pontificia
Universidad Católica de Chile. He completed his DPhil in sociology at
Oxford University in 2015, and his current work examines the connection
between taxation and labor markets in Latin America from a historical and
sociological perspective.
Néstor Castañeda is Assistant Professor of Latin American Political
Economy at University College London. His research focuses on business
interest groups, tax politics, political finance regulation, and economic
development in Latin America.
xi
xii List of Contributors
Mauricio Garita is a senior researcher at the Instituto Centroamericano

de Estudios Fiscales (Icefi) and a researcher at the Universidad del Valle de
Guatemala. He holds a PhD in politics and sociology from Universidad
Pontificia de Salamanca and a master’s in international business and man-
agement from Manchester Business School. His research focuses on tax
systems, competitiveness, and economic growth in Latin America. He has
published several chapters and books on the subject.
Juan Carlos Gómez Sabaini is a senior economist and international con-
sultant (ECLAC, IMF, IADB), specialized in the areas of public finance
and tax systems. He is also a postgraduate professor at the University of
Buenos Aires, Argentina. He is a former three-time deputy secretary of tax
policy in Argentina. He has authored numerous publications about tax
policy in Latin America.
Constantin Groll is a postdoctoral researcher at Freie Universität Berlin
(Germany) and an associate investigator at the desigualdades.net (FU
Berlin) project and the trAndeS network (Desarrollo Sostenible y
Desigualdades Sociales en la Región Andina) (FU Berlin & PUC Peru).
He holds a PhD in political science from Freie Universität Berlin (Germany)
and is editor of the e-journal Critical Reviews on Latin American Research
(www.CROLAR.org). His research interests include tax and fiscal policies,
inequality, and federalism in Latin America.
Osvaldo Kacef He has been former director of the Economic Development
Division of UN-ECLAC, undersecretary of macroeconomic program-
ming of the Ministry of Economy, director of the National Institute of
Statistics and Censuses, and head of research and economic statistics at the
Central Bank of the Argentine Republic. He has published numerous
studies and articles on economic issues, in particular in the areas of macro-
economic policy and economic development.
José Tomás Labarca is licentiate in history and master in sociology
(Pontificia Universidad Católica de Chile). His research interests relate to
historical sociology, focusing on the intertwining of social, economic, and
political processes. Some of his publications are “Cooperativas como
política pública: Electrificación rural en Chile, 1940–1970” (European
Review of Latin American and Caribbean Studies, 2016) and “‘Por los que
quieren un gobierno de avanzada popular’: Nuevas prácticas políticas en la
campaña presidencial de la Democracia Cristina, Chile, 1962–1964” (Latin
American Research Review, 2017).
List of Contributors
xiii
James E. Mahon Jr is Woodrow Wilson Professor of Political Science at

Williams College, Williamstown, Massachusetts. His recent scholarly work
includes the codirection of a project with the Wilson Center in Washington,
DC, which produced the edited volume Progressive Tax Reform and
Equality in Latin America (2015). Other recent publications include a
monograph on politics and tax reform in the Dominican Republic
(Fundación Global de Democracia y Desarrollo, 2015) and contributions
to two edited volumes on the politics of taxation. He holds a PhD from
the University of California, Berkeley.
Dalmiro Morán is an economist and international consultant specialized
in tax policy and tax administration (ECLAC, CIAT). He is deputy direc-
tor in the tax administration agency at the city of Buenos Aires, Argentina.
He has authored several articles focused on tax policy and tax reform,
environmental taxation, and natural resource fiscal management for Latin
American countries.
Corina Rodríguez Enríquez is an economist and holds a PhD in social sci-
ences. She is a researcher at the National Council of Research (Conicet) and
at the Interdisciplinary Centre for the Study of Public Policy (Ciepp) in
Buenos Aires, Argentina. She is an executive member of Development
Alternatives with Women for a New Era (DAWN). She is a member of the
Latin American Gender and Macroeconomics Group (GemLac) and a board
member of the International Association for Feminist Economics (IAFFE).
She works from the feminist economics approach on macroeconomics,
social and fiscal policies, labor market, poverty, income distribution, and care
economy issues.
Ryan Saylor is Associate Professor of Political Science at the University of
Tulsa (USA). His research focuses on how coalitional politics affects the
growth of state capacity. He is the author of State Building in Boom Times:
Commodities and Coalitions in Latin America and Africa (Oxford
University Press, 2014). His research has been published in journals such
as Sociological Methods & Research, Theory and Society, and World Politics.
His research interests include institutional development in early modern
Europe and public sector reform in the developing world.
Aaron Schneider work focuses on the intersection of wealth and power,
and he has conducted research in Latin America, India, and sub-Saharan
Africa. In particular, he emphasizes the study of public finance as a win-
dow into the political economy of development and democracy. The way
xiv List of Contributors
governments secure contributions from key social groups and what they
do with the money tells a story about the nature of national political com-
munities—who is in, who is out, and who will enjoy what benefits of
membership. He has taught at the University of Sussex, Tulane, and cur-
rently teaches at the University of Denver.
Maria Fernanda Valdés is a consultant in the area of inequality and is a
coordinator of tax issues for the Friedrich Ebert Stiftung in Colombia in
particular and Latin America in general. She has been a researcher for the
Colombian Ministry of Health, for the network “desiguALdades.net” at
Freie Universität Berlin in Germany, and for the Deutsche Gesellschaft für
Internationale Zusammenarbeit in Germany. She holds a PhD in econom-
ics from the Freie Universität Berlin and is the author of the book Reducing
Inequality in Latin America. The Role of Tax Policy.
List of Figures
Fig. 1.1 Latin American tax collection as share of GDP,

central government, 1960–2014 4
Fig. 3.1 Brazilian tax as a percent of GDP, 1990–2010 63
Fig. 3.2 Relative central government share of receipts
and expenditures, Brazil, 1900–2000 64
Fig. 3.3 Tax receipts as share of GDP in Brazil, 1994–2010 76
Fig. 3.4 Tax mix in Brazil, 2009 77
Fig. 4.1 Direct (income and property) taxes as percentage
of the total revenue, selected Latin American
countries, 1920–1990100
Fig. 5.1 Evaluation criteria of the main fiscal instruments
applied in extractive industries 133
Fig. 7.1 Colombia, top 1% income shares, 1990–2010 195
xv
List of Tables
Table 4.1 Features of 1920s and 1930s modern income taxes

in selected Latin American countries 98
Table 4.2 Motives and political consequences
of personal income taxation 106
Table 5.1 Latin America (selected countries): Structure
and relative indicators of fiscal revenues generated
by the production of hydrocarbons 138
Table 5.2 Latin America (selected countries):
Structure and relative indicators of fiscal revenues
generated by the production of minerals 142
Table 6.1 Tax incidence studies results in Argentina 173
Table 7.1 Tax reforms in Colombia 1990–2016 197
Table 7.2 Colombia: President’s ideology and partisan power,
1990–2016201
Table 8.1 Prevalence of tax incentives in Latin America and OECD,
as a percentage of total countries in 2014 219
Table 8.2 Tax expenditures in seven Latin American countries,
as percentage of GDP, 2000–2010 221
Table 8.3 Tax expenditure by tax as percentage of total
exempted in Guatemala, 2009–2015 225
xvii
CHAPTER 1
Introduction: Taxation in Times

of Uncertainty in Latin America
Jorge Atria, Constantin Groll,
and Maria Fernanda Valdés
1 Introduction1
Taxation is a highly studied subject in Latin America. However, even after
all the research conducted, all analyses and policy advices given, despite
numerous international advisory missions dedicated to tax systems over-
haul, and several tax reforms undertaken in the last few decades, many of
the central problems and weaknesses of Latin American tax systems
remain unaltered. Tax systems in the region lack to ensure market effi-
ciency, secure macroeconomic stabilization, or enhance equality via redis-
tribution, the three basic functions generally assigned to fiscal policy
(Musgrave 1959). Even after more than a decade of economic bonanza
J. Atria (*)
Pontificia Universidad Católica de Chile (Chile) & Centre for Social
Conflict and Cohesion Studies (COES), Santiago, Chile
C. Groll
Freie Universität Berlin, Berlin, Germany
M.F. Valdés
Friedrich Ebert Stiftung, Bogotá, Colombia
© The Author(s) 2018 1

J. Atria et al. (eds.), Rethinking Taxation
in Latin America, Latin American Political Economy,
DOI 10.1007/978-3-319-60119-9_1
2 J. ATRIA ET AL.
and rising state income, thanks to the global commodity boom, today it
seems more plausible than ever that taxation is the Achilles heel of Latin
American democracies.
Not only the evaluation of the progress and continuities in Latin
American tax systems is mixed, but also the outlook for positive changes
in the future is doubtful. In fact, tax policy in Latin America is facing a
moment of uncertainty as important changes in economic, political, and
social conditions are taking place that affect the region. At a global level,
Latin American countries face decreasing prices of their most important
export products, mainly commodities, unpredictable policy changes by
the new US government and a resurgent global protectionism. At the
domestic level, the economic slowdown rises social demands and political
polarization in a moment in which new ruling coalitions have taken over
in several countries.
Uncertainty not only describes the political and economic contexts of
the region, which one could argue is not all too new given Latin America’s
troubled history, it also describes the crisis of the research on taxation and
the questioning of the grand paradigms of tax policy. While in the 1990s
most governments in Latin America responded to slow economic growth
with liberal tax reforms, during the years of the commodity boom govern-
ments relied on a pragmatic adaption of their tax systems, taking advan-
tage of the upward commodity cycle but relinquishing structural reform.
Many countries in the region adjusted the taxation of extractive sectors
taking advantage of windfall profits, broadened tax bases, or modified tax
rates. If equity enhancing tax reforms were introduced, their overall effect
was marginal or their existence temporary. Now, as the economic super
cycle has come to an end and fiscal imbalances are on the rise, pressure for
structural tax reforms increases. Still, if such reforms resemble those estab-
lished in the 1990s or take a proequity stance, as wished by many observ-
ers (Bárcena & Kacef, 2011; Corbacho, Cibils, & Lora, 2013) is uncertain.
Current major reforms, such as in Ecuador and Colombia in 2016, which
increased value added tax (VAT) rates by 2 or 3 percentage points, how-
ever, may glimpse some patterns.
This book contends that the causes that impede the overcoming of
persistent and recognized challenges of Latin American tax systems have
to be understood more thoughtfully. The perspective of how taxation is
studied must be adjusted before tax policy can actually change for good.
For this, a new approach to studying taxation is necessary, which is useful
not only for understanding the complexity of taxation but also for leading
to recommendations and changes.
INTRODUCTION: TAXATION IN TIMES OF UNCERTAINTY IN LATIN AMERICA 3
This book offers this approach, emphasizing that tax analysis has to take
three neglected dimensions into account: the relational, the historical, and
the transnational dimensions of taxation. Applying these dimensions, as
the chapters in this book do, can provide vital results to confront the
social, political, and economic challenges of taxation in Latin America in
times of uncertainty. Following this approach, the chapters in this book
investigate diverse key topics in taxation, addressing singular or compara-
tive country case studies and providing desired answers to uncover the real
and persistent causes of the limitations in regional tax regimes.
Before describing the relational, transnational, and historical dimen-
sions of taxation and their value for tax analysis, the shortcomings of the
prevailing research on taxation are revised and the need for a new approach
to taxation is clarified. Finally, the seven contributions included in the
book as well as their significance for the three dimensions of this book’s
perspective are presented.
2 Taxation in Latin America: Progress

and Challenges
Tax systems in Latin American countries underwent significant changes

since the turn of the century; one particular characteristic of these changes
is the outstanding rise in the level of tax collection experienced in the
region. Yet, the full dimension of this transformation is best appreciated
once the long-term development of the tax state in Latin America is taken
into account. Following the data set by Morán and Pecho (2016) for cen-
tral government tax revenues of 18 Latin American countries, revenue
collection rose by 6.5 percentage points of GDP during the last five
decades, from an initial 9.7% of GDP in 1960 to 16.2% in 2014. Within
these five decades, different periods of tax system’s evolution can be
observed, which reflect distinctive approaches to tax policy in the subcon-
tinent (see Fig. 1.1).
Principally, four periods can be distinguished. First, the period start-
ing in the 1960s and ending with the oil crisis in 1970, which was char-
acterized by a paradigm shift in tax policies. In particular, this was the
period when the Alliance for Progress established the “Joint Tax
Program,”2 which soon became the main actor in the reform of tax sys-
tems in Latin America (Tanzi, 2013). Furthermore, in the 1960s devel-
opments in Public Economics began to give relevance to taxation not
4 J. ATRIA ET AL.
17
16
15
14
13
12
11
10
9
Fig. 1.1 Latin American tax collection as share of GDP, central government,
1960–2014
Source: Own elaboration on the basis of data by Morán & Pecho (2016: Annex),
LAC 18
only as a collecting tool but as a developmental one. Thanks to these

shifts and a positive macroeconomic situation, this was the period with
the highest increase in the last five decades, although starting from a
relatively low level. Latin American tax collection increased by 3.31 per-
centage points, from 9.54 of GDP in 1960 to 12.85 in 1975. In fact, the
changes were so strong that it is fair to say that taxation was completely
overhauled and never looked the same (Morán & Pecho, 2016).
However, the positive transformation in taxation did not prosper in the
following period. From 1970s onwards to the end of the 1980s, tax col-
lection did not rise significantly and remained highly volatile instead (see
Fig. 1.1). Ideologically, the oil crisis that started around 1973 marked a
turning point for certain ideas on taxation. In particular, the period coin-
cided with the advent of supply-side economics, which had its own vision
of tax policy emphasizing the reduction in efficiency losses, which it con-
sidered to be inherent in taxation. In economic and political terms, this
was a period of turbulence, including inflation, fiscal problems, rising debt
and frequent regime changes, and the struggle for democracy. Latin
American countries experienced strong economic and fiscal crises, in
search for a lender of last resort turned to international financial
organizations for assistance. The IMF and other “Washington consensus”
organizations did not relinquish to engage but bounded their loans on
heavy conditionalities, including a series of tax reforms with a strong
emphasis on simplification and efficiency. At the end of this period, taxa-
tion in the region reached its lowest value since 1972 (11.67 in 1989).
During the 1990s, taxation in Latin America was very much influenced
by the policy paradigm set by the Washington Consensus and the propaga-
tion of financial crises experienced at the end of the 1980s. In this third
period “liberal tax reforms” (Cornia, Gómez Sabaini, & Martorano, 2014)
set out to strengthen VAT, reduce or eliminate taxes on international trade,
decrease rates in income taxes, and broaden tax bases. However, also new
“heterodox” taxes were created, such as the tax on financial transactions or
simplified regimes for small businesses (González, 2009), and the political
independence of tax administrations was strengthened and modernized, all
with the aim to increase the much needed revenue to face recurring finan-
cial crises and global inertia. Despite these changes, the rise in tax collec-
tion was modest and only increased by 1.44 percentage points on average
(from 11.77% of GDP in 1990 to 13.21 in 2002), too low to satisfy social
demands or stimulate long-term growth.
Only in this long-term perspective the changes in tax collection in the
ultimate period can be fully appreciated. Average tax collection rose from
2002 to the end of the economic boom in 2014 3 percentage points, from
13.2% to 16.2% of GDP. Only in the 1960s Latin America had seen such
a rise in revenue collection, although starting from a much lower level.
Certainly, as many scholars have pointed out (Gómez Sabaini, Jiménez, &
Martner Fanta, 2017; Valdes, 2016), the magnitude and the length of the
expansive economic cycle, principally caused by exceptionally favorable
global economic conditions with peaking commodity prices and high and
stable international demand for Latin American export products, explain a
great part of these extraordinary positive dynamics.
In the boom period, progress in taxation was made principally in the
levels of tax collection, although important differences still remain among
Latin American countries. For example, countries like Argentina, Bolivia,
and Brazil collected more than 25% of GDP in 2014, while other countries
like Guatemala (10.66), Mexíco (10.60), and Panama (16.5) collected
much less revenue (Morán & Pecho, 2016). Still the positive tendency in
revenue can be observed in the vast majority of countries in the region. But
not only was the rise in the tax take positive, also the structure of revenues
got more equilibrated by augmenting the revenue share from direct taxes
at the expense of indirect taxes. Although this trend is not present in every
country, in the Latin American average the share of direct taxes (taxes on
income, payroll taxes, and property taxes) on total revenue collection rose
from 26.0% in 2000 to 31.4% in 2013, overwhelmingly driven by the rise
6 J. ATRIA ET AL.
in corporate income tax (IDB, CIAT, ECLAC, & OECD, 2015, 2017).
Finally, the professionalization of tax agencies, which already started in the
1990s continued and enhanced: such modernization included the imple-
mentation of new technology, the increase in expertise of the personnel,
more cooperation between national tax agencies in the region, and higher
efficiency in enforcement and control (Corbacho et al., 2013; Diaz Yubero
et al., 2013).
Nevertheless, albeit these positive changes in the last period, most Latin
American tax systems continue to collect too little, remain inefficient, and
problems of evasion and avoidance are rife (CEPAL, 2015). In addition,
the effect of taxes on income redistribution is weak, and, together with
limited social spending, the fiscal policy has little influence to reduce
income inequality (OECD, 2009).
In terms of collection, comparing with the OECD countries Latin
American tax regimes are still below their potential. On average Latin
American countries collect 11.43 percentage points less revenue than its
OECD counterparts (22.84–34.27) in 2015 (OECD et al., 2017).3 In
fact, following OECD data, Cuba is the only country in the region that
collects more revenue than the OECD average.
In spite of the already mentioned differences among Latin American
countries in the level of taxation, a common feature is that low tax collec-
tion is frequently coupled with a strong reliance on fiscal revenues from
commodity production. Tax and non-tax revenues from the hydrocarbon
and mining sectors combined still constitute more than one third of the
total revenue in the period from 2010 to 2015 in Bolivia (33.1%), Ecuador
(38.2%), Venezuela (39.3%), and Mexíco (33.7%) and around one sixth of
the revenue in Chile (13.8), Colombia (13.3%), and Péru (13.3%) (OECD
et al., 2017).
The reliance on commodity related fiscal revenue has intensified in the
boom period as most countries have taken significant steps to legally absorb
parts of the windfall profits of resource extracting companies, renegotiating
contracts, licenses, establishing additional non-tax and tax fees, or even
nationalizing extractive companies. A high reliance on tax revenues from
extractive industries does not only pose a threat to a country’s internal
regional disparities and ask for effective and efficient regional distributional
mechanisms, but it also exposes the country to the volatility of global
commodity prices (see Gómez Sabaini, Kacef and Morán in this volume).
In fact, nowadays in the wake of sharply decreasing international com-
modity prices and a reduction of global demand, such non-tax revenues are
falling significantly. Likewise, as ordinary tax revenues—like corporate

income tax—are also subject to commodity price dynamics due to the con-
centration of most Latin American economies, countries also have to face a
reduction of corporate and indirect tax revenues derived from the extrac-
tive sector (Valdes & Groll, 2016). Current studies suggest that revenues
in 2015 from hydrocarbon sector are at the levels before the price boom in
2001, which means that the time of “unwarranted revenue” (Girouard &
Price, 2004) in these countries has come to an end.
In addition, even after signs of improvement, the structure of Latin
American tax systems remains unfavorable. Indirect taxes are still the pri-
mary source of income in almost every tax regime in the region, with
negative effects on consumption and a negative or at least neutral effect on
redistribution via taxation. In 1990, consumption taxes represented
around 52% of the total tax revenues on average in Latin American tax
systems, while in 2013 the average dropped to around 49% (IDB, CIAT,
ECLAC, & OECD, 2016). The contribution of income taxes increased
from 23% to 27% of the total average tax collection between the two years.
However, this is less than 80% of the average share of income taxation on
the total tax revenues in OECD countries (IDB et al., 2016), and most of
this increase is based on corporate income tax and not on a higher collec-
tion of personal income tax, which is more progressive. Certainly, some
countries (Uruguay, Argentina, and Mexíco) deserve merit to tackle the
longtime neglected problem of inefficient and regressive income taxation.4
However, personal income tax contributes marginally (less than one-
seventh) to the overall tax collection (IDB et al., 2016), and major chal-
lenges such as the taxation of capital income or of inherited wealth remains
untouched. The claim of the Latin American “allergy” (Tanzi, 2000) to
personal income taxation still holds today.
Finally, tax evasion and tax avoidance remains very high in Latin
American countries, penalizing compliant taxpayers and significantly
reducing overall tax collection efforts. Even in relatively easy-to-collect
taxes such as the VAT, evasion remains widespread. In most Latin American
countries (Argentina, Costa Rica, Colombia, Ecuador, El Salvador,
Mexíco, and Uruguay) more than 20% of possible VAT revenue is evaded.
In countries such as Guatemala, Nicaragua, Panama, Péru, and Bolivia the
evasion rate is at 30% or more (Gómez Sabaini & Jiménez, 2012).
Although some recent studies suggest that in VAT collection evasion is
decreasing and several countries are coming closer to levels of VAT non-
compliance in the European Union, what is striking is that no common
8 J. ATRIA ET AL.
standard measuring tax noncompliance exists in the region and only a few
countries (Mexíco, Chile, and Uruguay) regularly publish data on the
issue (Gómez Sabaini & Morán, 2016). However, the challenge of tax
noncompliance is even worse where it matters the most. In “hard to col-
lect” direct taxes, such as the personal or corporate income tax, the reve-
nue potential of these taxes, already making a relatively low contribution
to overall collection in the region, is further diminished by evasion rates
higher than 30%. Even countries that are said to possess a solid institu-
tional capacity and have low tax evasion in VAT like Chile (12% in 2008)
loose more than 45% of income tax via evasion (Gómez Sabaini & Jiménez,
2012).
Yet evasion is not only noteworthy for the loss in revenue but also
because it depicts a broken fiscal contract and the negative effects of the
distributive potential of tax systems. High evasion rates show that in Latin
America a major share of taxpayers, especially in the top income groups,
deflect a higher tax burden and resist taxation (Atria, 2014; Bogliaccini &
Luna, 2016; Gaisbauer, Schweiger, & Sedmak, 2013; Torgler, 2005).
Together with already low contribution of direct taxes, low taxes on
mobile capital, volatile tax bases, and high rates of tax expenditure, Latin
American tax systems are far from providing fiscal sustainability.
3 A Moment of Uncertainty for Taxation in Latin

America
Although the eternal weakness of Latin American taxation remains severe,
the regional context is changing dramatically. After a decade of social and
economic progress (2003/2004–2014), where the region saw vigorous eco-
nomic growth, a reduction in poverty and inequality and a swelling of the
middle classes, Latin America is now facing a moment of uncertainty. This
moment stems from the combination of several rare economic, political,
and social events, which are unpredictable and involve vital consequences.
Economically, there is a significant weakening in the region’s economic
growth, which is not expected to improve any soon. Although after 2 years
in the doldrums with an average negative growth rate of −0.7 in the region
in 2016 (IMF, 2017), the region is expected to grow in 2017 again, the
rate of growth forecasted is disappointing (1.1% forecasted by IMF).
Furthermore, the projected rate has been already trimmed a couple of
times (IMF, 2017) due to mutated expectations of the recovery of leading
economies such as Brazil and Argentina, negative effects of the new US
government for growth in Mexíco, and a continuing recession in

Venezuela. In addition, smaller economies dependent on extractive indus-
tries or remittances have to face negative effects of falling commodity
prices and possible restrictions to flow of remittances. A strong rise in
foreign direct investments, much expected by new conservative govern-
ments in Argentina or Brazil, is also unlikely given the monetary policy of
rising interest rates in the United States. In sum, the economic outlook of
the region is dim, volatile and packed with uncertainty.
Even worse, some economic malaises that Latin Americans thought
they had banished decades ago are back runaway. This is the case for infla-
tion, which reached its highest average level in two decades (CEPAL,
2015). Already high since many years, inflation in Argentina is forecasted
to be 5.6% in 2017, the third highest in the world (Carriere-Swallow,
Jácome, Magud, & Werner, 2016). Worse yet is the situation in Venezuela
with hyperinflation expected to be at 720% in 2017 and 2068% in 2018
(IMF, 2017). The fiscal balance in the region also worsened and all the
countries experienced fiscal deficits for the first time since 2009 (CEPAL,
2017). In addition, since mid-2014 the region’s main currencies have
depreciated substantially on average against the US dollar (IMF, 2017),
which pushes inflation even further.
At the employment front, the picture is also flimsy: the unemployment
rate reached 8.1% in 2016, the highest level in a decade and 1.5 percent-
age higher than that in 2015 (ILO, 2016). Quality in employment wors-
ened and informality rose. Today around 25 million workers in the
continent are unemployed, and if forecasts of slow growth for 2017 hold
true, unemployment will increase again next year to 8.4% (ILO, 2016).
This economic uncertainty reflects significant changes in international
factors, which are likely to persist. The commodity super cycle occa-
sioned mainly by the industrialization of China and India and which was
Latin America’s engine of economic growth in the latest decades, has
reached its end. Prices for hydrocarbons are at the levels that persisted
before the commodity and prices for minerals significantly lower than
those during the heights of the boom period. Finally, the recent calls to
end global free trade and cross-border economic integration would hurt
productivity and incomes, and take an immediate toll on market senti-
ment, in a continent which is increasingly integrated into the global
economy since the 1980s.
Latin American countries are also witnessing a high degree of political
uncertainty due to the sudden turn in the political tide and the discredit of
10 J. ATRIA ET AL.
the political system caused by massive scandals of political corruption. The

rise of progressive governments, which brought left wing candidates into
power in countries as Venezuela, Brazil, Argentina, Uruguay, Nicaragua,
Bolivia, and Ecuador, has come to an end. New conservative forces have
taken over in Argentina, Brazil, and Péru, while in Chile, Bolivia,
Venezuela, and Ecuador opposition to leftist governments has increased.
The pink tide in Latin American politics has come to an end, and with
several corruption scandals and signs of mismanagement of public funds,
its legacy has been put to question.
Together with political uncertainty, the region is also facing an increase
in social unrest. The former years of deep social transformation created a
larger and politically active Latin American middle class (Justino &
Martorano, 2016). This class is eager to protect their recently gained stan-
dard of living, while social protests are facilitated by easier access to new
technologies and increased penetration rates of the social media. This new
“middle-class” has, at the same time, higher expectations of its leaders and
is unafraid of transforming its social demands easily into unprecedented
social protest. A good example are protests seen all around the subconti-
nent, from Chile, Argentina, and Brazil up to Mexíco. Many of these are
producing positive outcomes such as changing public agendas for reforms
and prompting innovations in policy making and governance, but many
have also resulted in social conflict, administration paralysis, and
polarization.
Uncertainty undermines what is taken to be a normal and habitual state
of things by introducing new disorder or ruining expectations over the
existing order. For tax politics, this moment of uncertainty is a trigger for
new challenges and reforms. In economic terms, it is clear that with a
lower revenue, current levels of spending are not sustainable unless sub-
stantial increases in tax revenue or fiscal austerity measures are carried out.
But who will bear the costs of these changes?
Some years ago, when the region was booming, scholars proposed the
need for restructuring fiscal contracts in the region (Bárcena, Prado, &
Hopenhayn, 2010; Bird & Zolt, 2015), rethinking the fiscal contract more
in line with the economic success and social progress witnessed. Now that
the region comes from a period of prosperity to a period of peril, the left is
on the way out, and the citizenship is more informed and demands secur-
ing social provisions, the fiscal contract is likely to be renegotiated and
newly defined. The idea of a fiscal contract is also relevant in political and
social terms. Taxation reflects the membership to a political community
and the legitimacy of the state (Grimson & Roig, 2011; Martin, Mehrotra,
& Prasad, 2009), while conflicts about taxation embody not only interests
but particular moral positions regarding the distribution of rights and
duties within the society (Murphy & Nagel, 2002). Thus, in current times
of uncertainty it is necessary to understand the social, historical, and politi-
cal contexts in which tax policy occurs, before it can be explained and pol-
icy advice given.
4 A New Perspective on Taxation in Latin America

This moment of uncertainty does not only trouble policy makers and gov-
ernments, it also challenges research based policy advice. Researchers have
to answer the question how to adapt to this changing context without
endangering the progress in taxation made in the past. At the same time,
the persistent challenges have to be addressed and overcome to enable the
full potential of taxation for sustainable development in Latin America.
Thus, this moment of uncertainty not only endangers the progress in the
existing tax systems in Latin America but also challenges the way taxation
is studied and research results are transformed into policy advice.
The idea behind this book is that understanding taxation particularly
in, but not limited to, times of uncertainty requires a new approach.
Although the persistent limitations and bottlenecks in Latin American tax
regimes are well known, past research has provided little insight on how to
effectively tackle them. Given the present and future challenges of taxa-
tion, the conclusions of research have to go beyond standard policy
advices—such as raising the level of taxation, ending the dependence on
non-tax income, or decreasing evasion—and provide a more encompass-
ing analysis, taking the social and political dimensions of taxes into account.
Such research is urgently needed to uncover the persistent causes of the
previously described limitations in Latin American taxation.
A revision of the past research on taxes in Latin America reveals some
recurrent shortcomings, which, in the end, discredit much of its findings
and widen the gap between research and policy makers, rendering much
of the research outcomes irrelevant for the latter. One of these shortcom-
ings is the idea that underlies—implicitly or explicitly—much of the cross-
country research on taxation in Latin America and policy advice derived
from it: the notion that researchers have to come up with a universal and
unique answer to very different national realities and tax trajectories. “One
size fits all” policy recommendations—either derived from theoretical or
12 J. ATRIA ET AL.
empirical reasoning—are even more doubting as tax experience in Latin

American countries is highly heterogeneous (Corbacho et al., 2013), and
therefore political economy analysis requires context-sensitive approaches
(Luna, Murillo, & Schrank, 2014). One-size-fits-all approaches could be
observed in policy agendas of international financial institutions, for
instance within the period of “liberal reforms” (Cornia et al., 2014) dur-
ing the 1990s,5 but also in the quest of simply increasing tax systems pro-
gressivity wished by so many in the last decade (Bárcena et al., 2010).
But examples can also be found within theories of public finance itself.
A good case is the famous approach to optimal taxation (Mirrlees, 1971;
Ramsey, 1927). Optimal tax theory has fascinated economists for a long
time just as it puzzled policymakers around the world. This perspective
declares some simple (technical) theoretical assumptions that tax policy—
in any given country—should follow to increase efficiency and equity in
taxation (Mankiw, Weinzierl, & Yagan, 2009). Although theoretically
sophisticated and logically self-contained, this approach to taxation is far
from providing practical policy advice, as it does not reveal anything about
the underlying causes of weak tax systems in Latin America or elsewhere.
But research can only claim policy relevance if it takes the existing realities
into account.
Finally, much of the research on taxation in Latin America is biased
toward socially and sometimes politically disconnected research. Such
research—frequently containing impressive statistical exercises—leads
researchers to conclusions, which stand in blunt contrast to the social and
political complexities in a given country. Too often, studies disregard the
embeddedness of tax systems within the wider social and political realms,
ultimately decontextualizing tax policy and neglecting the historical lega-
cies of tax systems. This omits that tax regimes developed out of conflicts,
compromises, and political agendas (Gaisbauer, Schweiger, & Sedmak,
2015). In addition, such an approach does not properly take traditional
phenomena such as the persistence of inequality (De Ferranti, Perry,
Ferreira, & Walton, 2004; PNUD, 2010), the distributive effects of neolib-
eral policies (Mahon, 2004), and the resilience of business groups (Arnson,
Bergman, & Frigenti, 2011; Fairfield, 2015; Schneider, 2012) into account,
all of which have an important influence on taxation in Latin America.
A new research perspective should name critical aspects of tax regimes
and provide analytical tools to study them in order to highlight the pos-
sibilities of policy change and the likelihood to reach such a change. The
call for a new approach to the study of tax systems in times of uncertainty
can build on a combination of insights from previous studies. In particu-

lar, such a new approach should include three dimensions of taxation fre-
quently understudied or neglected in contemporary analysis: the relational,
historical, and transnational dimensions of taxation.
4.1 The Relational Dimension of Taxation

Taxation has to be understood as a relational concept and tax systems as a
function of a strategic nexus between the state and the society. Tax systems
affect as well as reflect social relations (Bräutigam, Fjeldstad, & Moore,
2008; Campbell, 1993, 2009; Martin et al., 2009). Historically, taxation
not only gave rise to the modern nation state (Goldscheid, Schumpeter, &
Hickel, 1976), it also “helped to form it” (Swedberg, 1991, p. 108). This
is because, as Mann (Mann, 1949, p. 119) rightly claims, taxation serves a
social purpose. Taxation can work as a form of “social control” (Mann,
1943, p. 225), leading to a “correction of socially undesirable human
behavior, readjustment of economic power between social groups and
classes, and combating the social abuses of capitalism, facilitating the tran-
sition to another economic order” (p. 226). Interestingly, this social func-
tion of taxation is claimed now (Grimson & Roig, 2011; Piketty, 2014)
and then (Ardant, 1975; Marx & Engels, 2015; Weber, 2002) as one of
the main instruments to reverse capitalist economic development and to
contribute to class equality. Thus, taxation has the potential to interfere in
the composition and structuring of social and economic relations within a
given country.
However, this relation between the state and the society via taxation is
reciprocal and also works in the opposite direction. The particularities of a
tax system (tax structure, levels, and relation between tax and non-tax
revenues) as well as the characteristics of specific taxes (level, rates, exten-
sions, and evasion) enable us to understand the prevalence of special inter-
ests or dominant groups, moral or ideological configurations, or more
generally, the dominant social figuration in a given society (Elias, 1992).
Taxation as rightly put by Martin, Mehrotra, and Prasad (2009, p. 3)
“enmeshes us in the web of generalized reciprocity that constitutes mod-
ern society.” It is thus via the analysis of taxation that we may understand
the society, and it is via a better understanding of the society that we can
understand the persisting challenges to taxation in the region. Take for
instance the persistence of socioeconomic inequality in the region. One
can ask, is the poor level of tax collection in Latin America surprising given
the high and durable inequalities in the region?
14 J. ATRIA ET AL.
In addition, taxation also interacts with the state in a political dimen-

sion. There are good reasons to believe that historically taxation was a
main factor for the rise of the representative government (Tilly, 1985),
following the famous formula “no taxation without representation.”
Although there is no clear causality between taxation and representation,
there is evidence that shows that people do rebel against taxation without
commensurate government services, so that conflicts between citizens and
governments over taxes can lead to higher levels of democratic account-
ability (Ross, 2004, p. 247). Scholars frequently frame taxation as a fiscal
contract between a state and the society in general (Moore, 2008) or
between rulers and elites (Levi, 1988; Lieberman, 2003) in particular. The
perspective of tax systems as a (temporary) social contract, that is, the
temporary result of a bargaining process, may be fruitful to understand tax
system dynamics in contemporary societies.
But taxation has also to do with citizenship generally. Via the study of
taxation as well as some of its specific aspects, such as tax morale, elite tax
compliance, or the functioning of tax systems in everyday life, one can
infer about the norms and values in the society or its subgroups with
respect to the public good. As we are reminded by Grimson and Roig
(2011, p. 90), calling for the importance of social perceptions of taxes,
which manifest themselves in distinctive discourses, taxation constitutes a
way to interrogate the legitimacy of the state, where legitimacy is a pro-
ductive process of socially accepted understandings, always partial and
potentially conflictive.
A relational dimension contributes to a more realistic approach to study
a number of tax phenomena, focusing on conflicts of power, distributive
disputes, and the analysis of the social, cultural, and political consequences
of tax reforms. In times of uncertainty, this perspective can highlight
the frictions within societies as the underlying cause of the failed fiscal
contract—exemplified via the tax system—in Latin American societies. It
enables us to assess the likelihood whether the challenges in Latin American
tax systems can be overcome, and who will pay for potential costs arising
of adaptions or future changes.
Both aspects relate with traditional concerns of social sciences in the
region, such as elites and inequality. In fact, the elites should take the cen-
ter stage in tax policy analysis: first, for its economic contribution—higher
compared with the rest of the society, at least in absolute terms; second,
for its moral relevance—as it allows to know dominant ideas about taxes
and the social foundations that justify them; and third, to the extent that
the elites are more likely to influence the performance of institutions,

which may affect both lawmaking and the elites’ willingness to meet the
payment when the law is implemented (Fairfield, 2010). However, the
link between taxes and the elite understood from this perspective has not
been adequately explored. While the economic approach usually does, if at
all, include the elite on purely income terms (Piketty, 2014), studies from
other disciplines are focused on public opinion surveys on taxation, which
do not provide sufficient information to grasp the discursive power and
effective elite influence in the public debate and in the political arena.
In Latin America, although social sciences in recent years have made
significant progress in this respect (Ardanaz & Scartascini, 2013; Fairfield,
2015; Napoli & Navia, 2012; Schneider, 2012), further research is needed
to observe the role played by the elite in the evolution of tax systems, par-
ticularly dealing with historical, social, and cultural aspects, as well as the
consequences in terms of state–citizen relationship. A relational perspec-
tive can contribute to research on taxation in times of uncertainty, analyz-
ing whether the networks of reciprocity—which taxes symbolize—are
working properly, and to what extent social cooperation becomes institu-
tionalized in Latin American countries. These questions include, among
others, aspects such as state sovereignty, citizen expectations of fiscal insti-
tutions, the use of taxes or tax expenditures to make social policy (Howard,
2009), and the meanings of paying taxes.
Regarding inequality, there is ample space to explore its relationship
with taxation. Although there is an increasingly vast literature on taxation
in Latin America, its linkages with inequality have still not been fully
explored. Let us consider two examples: first, the lack of redistribution via
taxation. Despite the fact that a number of studies have shown the limited
role of fiscal policy in Latin America to reduce income inequality (Hanni,
Martner Fanta, & Podestá, 2015),6 as well as the contribution that pro-
gressive taxation can make against great disparities,7 there is less knowl-
edge on how this evidence interact with social discourses of different social
groups, particularly of elites. Thus, research dealing with perceptions and
beliefs of taxes may contribute to reveal the “moral economy of inequal-
ity” (Sachweh, 2012) in an important way.
Second, the comprehension of inequality in Latin America can benefit
from studies addressing specific features of tax systems. Taxation repre-
sents one of the crucial policy instruments to reduce socioeconomic
inequalities, and therefore the role of wealth taxes, the patterns of tax
compliance, the performance of tax administrations, and legal mechanisms
16 J. ATRIA ET AL.
to control tax planning and enforce tax avoidance, among others, may
uncover subtle mechanisms of inequality reproduction. Such features
influence the concentration of income among high-income taxpayers,
either favoring intergenerational transmission of wealth, facilitating tax
flight, or showing different priorities in terms of enforcement. Times of
uncertainty can constitute “critical junctures” and provoke institutional
changes in which these features are discussed and put in question.
4.2
The Historical Dimension of Taxation
Like other institutional configurations tax regimes have histories, as have
the social struggles that gave rise to them. In fact, historical patterns as
well as critical junctures are important to understand contemporary Latin
American tax systems. Historical constants play an important part in the
development of tax regimes but also in their ongoing dynamics, such as
the influence of natural resources dependence (Biehl & Vera, 2014;
Dunning, 2008), certain government structures, or the historically rooted
gap between elites and the rest of the society (Sokoloff & Zolt, 2007). All
of this may explain the common characteristics of Latin American tax
systems.
However, comparable historical processes do not necessarily lead to
similar outcomes. For example, although there is a general tendency that
tax levels rise with economic development (Wagners law), this process is
far from being evolutionary. Tax systems are not a function of moderniza-
tion (see in contrast Burgess & Stern (1993, p. 774f)), but may differ
considerably between countries with the same level of economic develop-
ment (Steinmo, 1993). Such differences may have historical explanations.
For example, in the case of European states, wars and belligerent rivalry
constitute critical junctures of both the rise of the modern nation state and
taxation, as “war, state apparatus, taxation, and borrowing advanced in
tight cadence” (Tilly, 1985, p. 180). In contrast, in the case of Latin
America, access to foreign credit provided an easily available alternative for
states elites to access finance without increasing taxation during war times
(Centeno, 2002) and may explain the poor levels of revenue collection in
the emerging Latin American countries in the eighteenth and early nine-
teenth centuries.
In addition, in the past, solutions to economic calamities have been
very different among countries and in different time periods. Still, these
crisis reactions may explain a great part of the peculiarities of Latin
American tax systems (Di John, 2006), as tax reforms are a likely policy
reaction in times of uncertainty. So far, research was mostly centered on a
neo-institutionalist theoretical approach to explain the outcomes of tax
reforms in the region (Fairfield, 2015; Focanti, Hallerberg, & Scartascini,
2016; Mahon Jr, Bergman, & Arnson, 2015; von Schiller, 2016). Future
studies should not only go beyond these issues and treat topics such as
public discourses, global tax advice, or the interaction between taxation
and specific international legal regimes to tackle wider issues of legitimacy
and resistance of tax reforms in the region, but should also take history
into account providing, for example via diachronic comparisons, new
insights into the political economy of tax reforms.
Exploring the historical dimension of taxation is especially useful in
times of uncertainty. Moments of uncertainty are likely periods of tax
reforms, which in the region have failed to achieve a fair and adequate
taxation, contribute to equality, and the safeguarding of a minimal level of
well-being for all the citizens. The current moment of uncertainty may
share common characteristics—such as devaluation, depressed capital
inflows, weak or negative economic growth, increasing fiscal deficits,
growing social and political unrest, and rising unemployment—with past
crises such as those in the 1980s but particularly those at the end of the
1990s, but the fiscal space, thanks to lower levels of debt, is greater. Tax
policy responses to this moment of uncertainty thus are likely to be differ-
ent, but the political economy aspects behind reform results have to be
understood to provide guidelines for the future. It is precisely by recog-
nizing similarities and differences between different historical moments
how a historical approach provides insights of what to expect and which
are the challenges that lie ahead in terms of taxes in the region. In addi-
tion, taking history into account enables us to observe the causes and
consequences of the longue durée of “chronic under-taxation”—in partic-
ular of the elite—in Latin American countries.
4.3 The Transnational Dimension of Taxation

Economic, social, and political processes, as well as capital and labor, fre-
quently trespass national boundaries and are increasingly global in nature.
Despite this obvious observation, the transnational dimension of taxation
is seldom studied and its consequences for changes in tax systems remain
underestimated. In a world of increasing economic interdependence the
interrelationship between the changing global process and domestic
18 J. ATRIA ET AL.
dynamics in tax systems should be analyzed more systematically, not only

to avoid “non-spatial thinking” (Leicht & Jenkins, 2007) but also to
enable new insights.
Previous research already stressed on the importance of globalization—
and especially global competition for foreign capital investment—for
changes in tax systems (Piketty, 2014; Swank, 2002, 2006). These studies
principally highlighted the constellation of domestic (political, social, or
economic) institutions for a decrease of tax levels, a shift toward indirect
taxation (Genschel, 2002; Steinmo, 1993, 1994), or differentiated effects
depending on the size of a country (Rademacher, 2013). In other words,
these studies aimed to describe the specific domestic institutional setting
which determines the domestic response to transnational effects. This is in
line with classic studies on the dependence of Latin American economies
(Cardoso & Faletto, 1972), which blame the historical dependence as a
core factor to explain social configurations in Latin American societies.
However, research has to move from observing dependence to the
study of interdependence. In times of increased globalization, domestic
politics and transnational phenomena are inseparably interrelated, causing
each other. Such interdependence might have been at work during the
1980s and 1990s when Latin American governments pursued “liberal” tax
reforms, either willingly and in collaboration or forced by international
financial institutions, resulting in lower protective tariffs and export taxes,
and an increasing focus on indirect taxation (Gloppen & Rakner, 2002;
Mahon, 2004). A focus on interdependence is also key to understand the
dynamics related to the persisting challenges of taxation of transnational
companies and highly concentrated mobile income. Just as investigative
journalism in form of the Luxembourg Leaks or Panama Papers has shown,
aggressive tax planning and transnational strategies of tax evasion are
impossible without the help of domestic facilitators and deficits in national
legal regulations and international trade regimes.
The interdependence of Latin American economies with the global
economy within this moment of uncertainty is exceedingly evident. Albeit
all nationalist-developmentalist rhetoric and emblematic events of left wing
governments in the beginning of the century, like the nationalization of
foreign companies or the rejection of the US-backed Latin American Free
Trade Agreement, Latin American economies are more integrated into the
world economy than two decades earlier. Trade increased as the percentage
of GDP rose from 44.09% in 2000 to 50.29% in 2013 in the whole region
(WITS, 2016). Although there has been a significant change of top trading
partners in some countries, the region’s exports, and especially commodity
exports gained special significance during the last decade. Driven by the
commodity boom Latin American economies have experienced a “reprima-
rización,” meaning that the commodity sector has gained increasing impor-
tance for the entire economy.
Most commodity exporting countries were able to take advantage of
the unique combination of high prices and persistent international demand
in the form of increased economic growth. Frequently, commodity export-
ing countries reformed their tax instruments for extractive sectors exploit-
ing the extraordinary profits caused by the price boom in commodities
(Altamonte & Sanchez, 2016). As prices of commodities are falling and
international demand dwindling, the interdependence of Latin American
economies with the global economy become more evident again. Volatility
of demand and prices are thus a key factor to understand the composition
and dynamics of tax system in these countries. Future research should
therefore further explore the effect of volatility and uncertainty, caused by
global economic changes.
5 Research on Tax Regimes in Times

of Uncertainty: Content of the Book
The chapters in this book respond to the call to explore taxation within
this new perspective. Although each of them examines a different tax issue
either in a country case or in a comparative perspective, they have in com-
mon that each of them responds and operationalizes at least one of the
three dimensions of taxation exposed above. Apart from their specific
research results, they provide insights that help to better understand cru-
cial aspects of tax systems in the region and overcome the existing chal-
lenges in times of uncertainty.
Two chapters in this volume are increasingly relevant for the explora-
tion of the historical and relational dimensions of taxation. In the com-
parative study of Brazil and Argentina, Ryan Saylor explores the historical
and transnational roots of the weak tax institutions in the region. Situated
in the period after the War of the Triple Alliance, he can show that govern-
ments were unable to impose sustainable tax systems in both the countries
due to the dominant influence of indebted elites in domestic politics. As
these groups could take economic advantage of monetary depreciation
and inflation and rejected higher taxation, they obstructed the construc-
tion of a sustainable tax system. By stating his argument, Saylor not only
makes a contribution to the puzzle of the failed war and taxation link in
Latin America (Centeno, 2002; Tilly, 1985), he also highlights how the
20 J. ATRIA ET AL.
interdependence between global capital and domestic elites influenced

domestic tax policy and set the path for unsustainable public finance for
the years to come.
The contribution by Aaron Schneider chooses a different entry point to
understand the evolution of the Brazilian tax system, which is certainly
among the most perplexing in the continent. Although tax collection in
Brazil is much above the regional average, the system suffers from severe
problems of federal tax coordination, scattered tax bases, and tax ineffi-
ciencies. Exploring the historical dimension, Schneider can show how this
system emerges taking into account the political bargaining within
Brazilian federalism, where regional political actors are powerful brokers,
and the changes in balances of power between domestic social groups are
divided by their relation with the global economy. His main argument is
that only with a parallel overhaul of federal as well as tax institutions Brazil
made progress in building state capacity, that is, fostering the tax state.
This connects to contributions that understand taxation and federalism as
a crucial feature of state capacity (Lieberman, 2003; Soifer, 2015) but
expands such a perspective with a close, historically, and relationally
informed understanding of taxation.
Two further studies in this volume amplify this transnational perspec-
tive of taxation and analyze how the global interdependence of countries
shaped tax systems in Latin America. Both chapters focus on the effect of
the volatility of commodity prices and the specific intersection of Latin
American economies into the global market. Biehl and Labarca recall in
their chapter the reasons of why the income tax, enacted in most Latin
American countries in the 1920s and 1930s, could not prosper as a deci-
sive tax instrument. They argue that the fall of commodity prices was a
principal reason behind the introduction of this proequity tax. However,
at the same time high uncertainty resulting out of a volatile global eco-
nomic setting and the domestic conflicts in labor markets caused the tax to
be only a short-term success. With their analysis, they help understand the
reasons why tax systems in the region do not contribute sufficiently to a
reduction of income inequality because of the poor participation of direct
taxes in the tax mix. However, they provide hope because a higher share
of direct taxation is not unknown in the region, although its history is
mainly class based.
Gómez Sabaini, Moran, and Kacef conceptualize the transnational
dimension of taxation in economic terms, highlighting the effects caused
by high volatility. Latin America is not only the most crisis-ridden conti-
nent in the world (CEPAL, 2010) but it is also prone to changing prices
of the principal export commodities. In their chapter, they show how vola-
tility can affect fiscal policy in general and taxation in a particular way.
Focusing on countries that share a high dependence on nonrenewable
resources, such as hydrocarbons or minerals, they offer an evaluation of
the tax instruments applied to the extractive sector and show that although
most countries made progress in adapting tax instruments to the price
boom in the last decade challenges to fiscal sustainability continue to exist.
Taxation is conditioned as well as it conditions social relations within a
society. This principal idea behind the relational dimension of taxation
offers possibilities to include topics in the analysis of taxation, which have
remained outside the mainstream. The chapter by Rodríguez Enríquez
and Águila is a good example for this. Building on the contributions of
feminist economics (Waring, 1990), they explore the gender bias of taxa-
tion in Argentina. Their analysis shows that, although progress has been
made in Argentina in the last decade to increase revenue collection and to
avoid explicit gender disadvantage in tax legislation, as for example present
in some European countries, taxation has implicitly, via the regressivity of
taxation and high levels of income inequality, a gender bias disfavoring
women. Their observations deserve attention because they contribute to a
recently emerging research field (Grown & Valodia, 2010; McCaffery,
2008). They are also important as they help to comprehend taxation as a
factor that penetrates and perpetuates social inequalities.
The chapter by Castañeda offers a complementary perspective of the
relational dimension of taxation, focusing on the influence of organized
social groups. In this chapter the author shows that understanding the
influence of organized capital in tax policy making is decisive to explain tax
policy outcomes in Colombia. Similar to the findings of related studies in
this area (Castañeda, 2017; Fairfield, 2010; Schneider, 2012; von Schiller,
2016), this contribution highlights that even if tax reforms are likely, given
the conditions of the political system, the outcome of tax reforms is highly
dependent on mostly informal and direct influence of organized business.
This influence explains why progressivity and efficiency in taxation was
only marginally improved in Colombia.
The chapter by Garita provides an additional view on the interrelation
among existing social configurations in a country, namely, the privileged
status of economic elites, and taxation. In particular, this chapter studies
one of the most disappointing but at the same time less-studied countries
in terms of tax collection: Guatemala. Garita shows that part of the low
development of the Guatemalan tax state is caused by important privileges
in the form of tax exemptions, credits, or deductions, which, although
22 J. ATRIA ET AL.
seldom materialized in the desired outcomes, are perpetuated by subse-

quent legislation and outlast changes of governments. Such tax privileges,
as the author shows, are very frequent in the region and highlight that the
political economy of tax design is prone to the influence of special interests
and the power of organized capital.
Finally, the last chapter by Atria, Groll, and Valdés summarizes the value
of the contributions for the exploration of five crucial topics related to taxa-
tion. This conclusory chapter highlights the value of a relational, historical,
and transnational perspective on taxation for the relation of taxation to
topics such as inequality, volatility, citizenship, elites, and fairness. While
the chapters in this volume make important contributions to sharpen the
understanding of these relationships, the chapter proposes future steps to
take in the analysis of taxation via the multidimensional perspective pro-
posed. In addition, the authors deduct policy implications of this book,
which are likely to become increasingly important if the moment of uncer-
tainty Latin America faces today continues or deteriorates.
Notes
1. Jorge Atria’s research for this chapter was supported by the Chilean Sciences
and Technology National Council under Grant number 3160705,
and Centre for Social Conflict and Cohesion Studies (Conicyt/
Fondap/15130009).
2. Alliance for Progress was an international economic development program
established by US President John F. Kennedy and 22 Latin American coun-
tries in the Charter of Punta del Este (Uruguay) in 1961. The objective was
to promote political democracy, economic growth, and social justice in
Latin America.
3. Data including social security.
4. Such reforms of personal income tax principally aimed to improve collection
via different mechanisms: the modification of the tax base (especially to
improve taxation of capital income), change in aliquots, and new rules for
international taxation. In some cases, dual income taxes were introduced,
the minimum taxes modified or introduced, and the fiscalization of big con-
tributors increased (CEPAL, 2015).
5. In this period, the basic receipt to tax reform encompassed (a) the elimina-
tion of taxes on trade (import and export), (b) the simplification of the
personal income tax (PIT) and an increase in its regressivity commonly justi-
fied with an aim to provide incentives for employment and private invest-
ment, and (c) a reduction in (high) corporate (income) tax rates based on
the argument to prevent capital flight and encourage FDI. With several
Latin American countries subject to conditional lending during the 1990s,

liberal reforms were frequent in these countries.
6. According to these authors, fiscal policy in the OECD is more effective in
reducing inequality as the Gini coefficient falls by 36% after direct taxes and
transfers, compared with 6% in Latin American countries (in absolute terms,
the Gini coefficient falls 17% in the OECD and only 3 points to the average
of 17 Latin American countries). See Hanni et al. (2015, p. 25).
7. Unlike the view which assumes revenue is its only aim.
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PART I
Historical Dimension of Taxation

CHAPTER 2
Debtor Coalitions and Weak Tax

Institutions in Latin America: Insights
from Argentina and Brazil
Ryan Saylor
1 Introduction
A striking feature of Latin American states is their wanting tax capabilities.
Today, Latin American governments extract tax revenues at about half the
rate of their counterparts in the advanced industrialized world. They also
rely heavily on indirect taxes, which are relatively easy to collect. Their fis-
cal institutions are weaker and less diversified than their European coun-
terparts (Centeno & Ferraro, 2013, p. 409). This state of affairs is not
new. Fiscal underdevelopment in Latin America has a long history. The
tendency to emphasize easy-to-collect revenues solidified in the second
half of the nineteenth century, which was the region’s formative state
building period. These state-building legacies persist in the contemporary
era (Kurtz, 2013, pp. 10–12).
There are a few strands of scholarly thought that seek to account for
Latin America’s underwhelming extractive capacity and state building more
generally. First, one thread highlights how Latin America’s tax capability
This chapter draws on Saylor and Wheeler (2017).
R. Saylor (*)
Department of Political Science, University of Tulsa,
OK, USA

DOI 10.1007/978-3-319-60119-9_2
32 R. SAYLOR
mirrors other outcomes in the political economy. Dependency theorists

stress how the incorporation of Latin American states in positions of
economic dependency in the world market forced them to concentrate on
primary commodity production and stunted their institutional development
(Cardoso & Faletto, 1979; Gallo, 1991). Similarly, the resource curse litera-
ture focuses on how certain commodities, especially oil, can obviate the
need to build a tax apparatus (Karl, 1997). Indeed, all primary commodities
can be taxed easily as they move through ports, which discourages the
development of extractive prowess to obtain more elusive forms of revenue,
such as land or income taxes (Saylor, 2014a, p. 3). Institutional debility and
relative economic weakness can, in turn, facilitate economic crisis—a key
cause behind fiscal policy interventions by external actors, such as the
International Monetary Fund (Mahon, 2004). Overall, structural features
of the political economy have impinged on fiscal development.
Second, “elite theory” examines how elites influence fiscal policy and its
implementation (Martin, Mehrotra, & Prasad, 2009). Levi’s (1988) seminal
study emphasizes how rulers use norms and ideology as a means to motivate tax
payment through quasi-voluntary compliance. But in general, Latin American
elites have not pressed for robust tax systems (Centeno, 1997). Within the
region, Soifer (2015) highlights how varying elite ideologies produced diver-
gent fiscal systems in Chile, Colombia, Mexico, and Peru. Schneider (2012)
similarly points to differing levels of elite cohesion and dominance to account
for variation in Central American tax regimes (other elite-centered accounts
include Carmagnani, 1995; Fairfield, 2015; Kurtz, 2013). Last, Lieberman
(2003) offers a cross-regional analysis of how people’s value-rational group
attachments can sway fiscal policy. Each of these studies highlight how elites and
broader social currents combine to chart a country’s fiscal course.
Third, bellicist theory underscores how war can stimulate fiscal develop-
ment. Unrelenting conflict in early modern Europe prompted rulers to
erect permanent institutions and later strengthen them, particularly for taxa-
tion. Although many Latin American countries fought lots of external and
internal wars during the nineteenth century, there were a couple differences
when compared with those of Europe. Latin America’s external wars were
sporadic, not endemic, and they were generally not existential threats to a
country’s leadership. Rulers faced graver threats from internal actors, such
as regional caudillos. Consequently, taxation remained decentralized as a
means to keep the peace (Centeno, 1997, 2002; López-Alves, 2001). There
have been episodes where internal conflicts have constituted an existential
threat and induced fiscal development, such as in late-twentieth-century
Colombia, but they are atypical (Rodríguez-Franco, 2016).
DEBTOR COALITIONS AND WEAK TAX INSTITUTIONS IN LATIN AMERICA... 33
Yet, nonetheless, Latin American countries were exposed to consider-

able bellicist pressures during the nineteenth century (Centeno, 1997,
pp. 1570–1573). And the key causal mechanism that led to fiscal states in
Europe was present in Latin America. Like their early modern European
counterparts, when Latin American states went to war, governments bor-
rowed money to fund wartime expenses. But afterward, things differed.
Centeno (1997, p. 1586) notes that “Many European countries initially
used debt to pay for wars and later taxed in order to meet their obliga-
tions. What distinguishes Latin America is that the fiscal reckoning never
came… [and instead] fueled unproductive cycles of speculation and ruin.”
Identifying what severed this link can go far to understanding why Latin
American states maintained lackluster extractive power in response to
growing public debt loads. Indeed, scholars of the European fiscal state
are simultaneously trying to explain why some rulers in early modern
Europe built robust tax institutions to deal with their wartime debts, while
others did not (Yun-Casalilla, 2012).
I contend the answer lies with the makeup of a country’s ruling coali-
tion and the relationship of coalition members to the country’s credit
market. I posit that wartime debt will prompt fiscal institution building
when it assists the private economic interests of a country’s ruling coali-
tion members. I differentiate between the “net creditors” (net lenders)
and “net debtors” (net borrowers) in a country’s credit market. Net credi-
tors should support fiscal diversification and institution building because
these actions help ensure debt service, stifle inflationary pressures, and
support the value of creditors’ outstanding loans. By contrast, net debtors
receive a relative gain from inflation and currency depreciation, because
these things reduce the real interest rate on their debts. Net debtors should
therefore be more indifferent to debt servicing and less willing to
strengthen tax institutions. The composition of a country’s ruling political
coalition can help account for why rulers may not respond to the fiscal
exigencies of warfare as expected by bellicist theory.
I support this argument with case studies of Argentina and Brazil in the
aftermath of the War of the Triple Alliance (1864–1870; also known as the
Paraguayan War). The War of the Triple Alliance was Latin America’s grand-
est war and similar to the “total” wars fought in early modern Europe
(Centeno, 2002, p. 56). It also led to a substantial growth of public debt in
Argentina and Brazil. But afterward, neither government built stronger tax
institutions to service debt. In Argentina, a powerful group of debtor ranch-
ers refused to overhaul tax institutions, even though British merchants
34 R. SAYLOR
(the country’s net creditors) pleaded with them to do so. Ruling coalition
members’ private economic interests swayed fiscal policy and stunted insti-
tutional development. In Brazil, debtor coffee planters, the country’s stron-
gest force, also foiled movement toward a fiscal state.
The argument and findings in this chapter parallel the themes of this
volume. First, there is an important historical dimension to understanding
taxation in Latin America today. War and the preparation for war in the
nineteenth century did not result in stronger fiscal institutions. Instead,
institutions stagnated, and in some manner these historical legacies con-
tinue to reverberate. Second, the war-makes-states model did not take
root in Latin America largely because of coalitional politics. Coalitions of
net debtors did not regard building tax capacity to be in their self-interest.
This finding illustrates how extractive development ultimately hinges on
relations between state and society. Third, the presence of debtor coali-
tions throughout Latin America was itself a function of the region’s place
within the global hierarchy. Nineteenth-century Latin America was a
capital-poor region, which meant that net creditor coalitions—the type
that I maintain are crucial for the creation of robust fiscal institutions—did
not exist. Debtor coalitions dominated the region’s politics to the detri-
ment of tax institutions. Hence, the global economy conditioned the sort
of political coalitions that would flourish in Latin America and thereby
influenced institutional trajectories.
I develop my argument in the following section. By focusing on the
coalitional dimensions of tax policy, I underscore that war, even when it is
large and encompassing, will not necessarily provoke fiscal institution
building. Coalitions led by net debtors have economic reasons to oppose
strengthening tax institutions, even though such actions promote the
growth of state capacity and, by extension, geopolitical power. To be clear,
I do not claim that all fiscal behavior can be reduced to the distinction
between net-creditor and net-debtor coalitions. Rather, I see this chapter
as enriching current theories, by showing how structural economic factors,
elites’ dispositions, and bellicist pressures intersected in debates over fiscal
policy and potential institution building. After I expound my argument, I
present comparative historical case studies of Argentina and Brazil. The
cases depict circumstances in which a large war and growing fiscal pres-
sures did not provoke rulers to build fiscal capacity, even as macroeco-
nomic problems mounted. These cases epitomize the detrimental influence
that debtor coalitions had on the prospects for building fiscal states in
nineteenth-century Latin America.
2 Debtor Coalitions and Fiscal Policy

in Nineteenth-Century Latin America
The expectation that war promotes state building draws on the European
experience and bellicist theory. When conflict erupted in early modern
Europe, rulers had to quickly raise money, because war costs easily out-
stripped ordinary revenue. Extraordinary taxes could not realistically fund
war-making, so leaders normally turned to holders of liquid capital and
borrowed money. After wars ended, rulers had to grapple with their debts.
Many of them imposed new types of taxes, which resulted in the diversifica-
tion of revenue sources. Some also strengthened fiscal institutions, such as
by supplanting tax farmers with state agents to collect taxes. These develop-
ments were part of the “ratchet effect” in many countries, whereby higher
levels of wartime taxes and spending remained after hostilities ended.
Gradually, these changes helped forge the modern state. Hence, wars build
states partly through the creation of new tax institutions (Tilly, 1992).1
Government leaders had two compelling reasons to repay their debts.
First, diligent debt service signaled to capital holders that a ruler was a
reliable borrower, which made it easier to get loans in the future. Second,
growing debt loads can have negative macroeconomic ramifications, such
as currency depreciation and inflation.2 Inflation can imperil leaders
because it reduces people’s purchasing power and can spiral, two develop-
ments any ruler—especially those with limited capacity to contain popular
uprisings—would like to avoid. One way to mitigate the problems associ-
ated with rising debt loads is by building a stronger and diversified tax
apparatus. Fiscal diversification promotes stable revenue flows, helps
ensure debt service, and thereby dampens inflationary pressures (Baldacci
& Kumar, 2010; Catão & Terrones, 2005). Wartime debts should pro-
mote the diversification and strengthening of fiscal institutions because
these developments inhibit inflation.
Wars can therefore stimulate the development of extractive capacity,
which many scholars regard as the crux of state capacity generally. In Latin
America, however, warfare did not have such beneficial effects, even
though Latin American states were frequently fighting in the nineteenth
century and funded their activities with debt. Instead, wars “produced
blood and debt and not much more” (Centeno, 2002, p. 127). On one
hand, some scholars question the applicability of Tilly’s model to Latin
America, principally because the geopolitical context was less bellicose and
the struggles were not existential—with the implication being that rulers
36 R. SAYLOR
did not need to build strong institutions to survive (e.g., Kurtz, 2013,
pp. 21–22; Soifer, 2015, pp. 204–206). But on the other hand, even if
wars were not existential threats, the growing debt loads that accompa-
nied war-making exposed leaders to potential macroeconomic and politi-
cal pitfalls. And yet governments remained indifferent toward strengthening
tax institutions to facilitate debt service.
I contend that rulers’ indifference to fiscal development reflected the
economic interests encapsulated within their underlying political coali-
tions.3 Political leaders depend on a coalition of social actors. Some actors
believe that institutional strengthening to ensure debt service will assist
their private economic interests. Other actors believe that their interests
will be better served by halfhearted debt servicing. I differentiate actors
based on their overall position within a country’s credit market: whether
they are net creditors or net debtors. These positions affect actors’ atti-
tudes toward inflation, and these attitudes become manifest in fiscal policy
and institutional outcomes. I focus on these interests to account for why
rulers and their underlying coalition of supporters might not respond to
growing debt loads as expected by bellicist theory.
Net creditors are net lenders in a credit market, meaning that they are
owed more money than they owe to others. They fear inflation and cur-
rency depreciation because these things push down the real interest rates
on their outstanding loans and produce a relative economic loss. Net cred-
itors therefore desire dedicated public debt service, even if they do not
loan the government money. They should be disposed to fiscal diversifica-
tion and institution building. Historically, in early modern Europe, mer-
chants and other urban capitalists were prominent financiers of wars. Fiscal
diversification would buttress their lending activities and also shift the tax
burden away from trade flows and toward landed wealth, which was often
shielded from taxation. Ruling coalitions that include net creditors should
want to strengthen tax institutions after costly wars.4
Net debtors—who have borrowed more than they have lent—are less
inclined to support fiscal institution building, because indifferent debt ser-
vice can benefit them. Inflation and currency depreciation reduce a loan’s
real interest rate and enable borrowers to pay off debt with money that is
becoming less valuable. Borrowers profit in such circumstances.
Consequently, net debtors should be relatively unconcerned with diligent
public debt service, even if they have lent the government money.
Government creditors naturally want their loans repaid, but they may wel-
come inflationary policy if they are net debtors overall. I reason that the
macroeconomic implications of fiscal policy mattered more to them than

the effective interest rate on particular public loans, because macroeco-
nomic changes affected all of their credit market activity.
Landed elites in nineteenth-century Latin America were a prime exam-
ple of net debtors. They were also economically and politically powerful.
Latin American countries featured highly unequal distributions of land,
which were typically inherited from the colonial era. This fact was true for
centers of colonial activity, such as Mexico and Peru, as well as for colonial
backwaters, such as Argentina, Chile, and Uruguay (Bulmer-Thomas,
1994, pp. 92–96; see also Cardoso & Faletto, 1979; Stein & Stein, 1970).
For example, in mid-1850s Chile, a mere dozen families accounted for
nearly 40% of the income generated among large estates in the Central
Valley, the country’s agricultural heartland. Chile’s statistical yearbook esti-
mated that in 1916 more than 70% of land in the Central Valley was held
by less than 2% of all owners (Bauer, 1975, pp. 178, 129). Large landed
estates also predominated across Central America, with the exception of
Costa Rica (Williams, 1994). Landed elites typically harnessed their eco-
nomic power to become the dominant political force within a country.
Despite their wealth in land, landed elites in Latin America were capital-
poor, because capital was scarce in the region. They were net debtors.
External actors, including foreign merchant firms, largely controlled capital
in Latin America (Cardoso & Faletto, 1979, pp. 29–73; Paige, 1978,
pp. 12–13). During the propitious nineteenth century, many landowners
entered or deepened their engagement in the export trade, and these devel-
opments created demand for capital (Bulmer-Thomas, 1994, p. 97). There
are myriad examples of surging credit demand among the region’s export-
oriented actors, including in Argentina, Brazil, Central America, Chile,
Colombia, Peru, and Uruguay (Kurtz, 2013, pp. 120–125; Saylor, 2014b,
pp. 651–657; Williams, 1994, pp. 147–156). In the mid nineteenth cen-
tury, these credit demands were usually met by foreign, particularly British,
merchant firms (Greenhill, 1977, pp. 162–172, 180–185; Marichal, 1989,
pp. 77–78; Taylor, 2006, pp. 61–68). Latin America’s landed elites were
net debtors and stood to gain from inflationary policy. Their credit market
position should not have induced desires for robust fiscal institutions.
There are a few other reasons why net debtors in Latin America should
have been content with weak tax institutions. First, when landowners
export their produce, inflation and depreciation make their goods cheaper
abroad. This implication would have been palpable in nineteenth-century
Latin America. A secular commodity price boom began around 1850,
38 R. SAYLOR
which prompted landowners and other export-oriented actors to more

deeply engage in world trade (Bulmer-Thomas, 1994, pp. 46–82; Cardoso
& Faletto, 1979, pp. 29–73; Williamson, 2012). Inflation and currency
depreciation would assist their economic interests, so long as currencies
depreciated faster than domestic prices rose—which was generally the case
in the nineteenth century (Bulmer-Thomas, 1994, pp. 114–115). Indeed,
seminal studies of Chile attribute hacendados’ indebtedness and export-
orientation as key reasons why Chilean policymakers were indifferent to,
and perhaps even welcoming of, inflation (Fetter, 1931; Hirschman, 1963,
pp. 161–171).5 An export-orientation was another reason why ruling elites
might balk at strengthening tax institutions.
Second, landowners also found ways to shelter themselves from the
corrosive effects of inflation. They did so by appropriating economic sur-
plus directly from their tenant farmers, rather than through market mech-
anisms. Rental contracts were one way that landowners shifted risk onto
their tenants, as rents were fixed, while commodity prices fluctuated. Some
tenancy arrangements exchanged usufruct rights for a specified amount of
labor. Another tactic was remuneration in store credits (e.g., pulperías in
Chile or tiendas de raya in Mexico), rather than in monetized wages;
estate owners could then ensure that local store prices outpaced inflation.
Landowners could also insulate themselves against price volatility by mak-
ing advance delivery contracts with cash-strapped sharecroppers (Bauer,
1975, pp. 96–101, 138–140; Paige, 1978; Schwartz, 1989, pp. 13–14).
Or landowners could simply rely on coercion. The result was a semi-servile
labor force in many countries, which helped provide a dependable and
cheap labor supply and insulate landed elites against market changes
(Bulmer-Thomas, 1994, p. 87; Huber & Stephens, 1995; Williams,
1994). Overall, the structure of power on many landed estates helped
protect owners from macroeconomic fluctuations.
Third, landed elites favored undiversified fiscal institutions because they
could shield themselves from taxation and state oversight. Latin American
governments instead relied on easy-to-collect taxes, especially import
duties. Tax policy was regressive and aimed at consumers (Centeno, 2002,
pp. 116–137, 158; Marichal, 2006, pp. 449–453). There were exceptions
to the reliance on customs duties, such as in Mexico, though the Mexican
state was loathe to tax landed wealth (Centeno, 2002, pp. 118, 132–133;
Marichal & Carmagnani, 2001, pp. 296–312; Soifer, 2015, pp. 170–172).6
Landed elites’ desire to avoid direct taxation contributed to restricted fis-
cal policy. Taxes therefore fluctuated with changes in the world economy,
exposing governments to significant risk associated with debt servicing.

To compensate, governments typically ran budget deficits, rather than
using countercyclical fiscal policy. Budget shortfalls were met with debt
issues, which further promoted currency depreciation (Bulmer-Thomas,
1994, pp. 109–113). In short, fiscal policy was consistent with the inter-
ests and attitudes of the region’s export-oriented debtors.
Overall, I do not claim that all fiscal behavior can be reduced to the
distinction between net-creditor and net-debtor coalitions, though I
believe that it can enrich current theories. War, even when it creates new
fiscal pressures, does not functionally lead to state building. There are a
variety of reasons why ruling coalitions led by net debtors will oppose, or
at least not actively promote, strengthening fiscal institutions. The con-
stellation of such factors was severe in nineteenth-century Latin America.
The coming case studies of Argentina and Brazil depict situations in which
a large war and growing fiscal pressures did not provoke rulers to build
fiscal capacity, even as macroeconomic problems mounted. This chapter
contributes to uncovering the reasons why fiscal institution building might
not follow the trajectory expected by bellicist theory.
3 The Aftermath of the War of the Triple

Alliance in Argentina and Brazil
In this section, I analyze the impact of the War of the Triple Alliance, Latin
America’s grandest war, on the postwar fiscal policies of its two largest bel-
ligerents, Argentina and Brazil. In general, Latin America experienced
considerable warfare during the nineteenth century, which should have
encouraged the development of extractive capacity. In particular, the War
of the Triple Alliance was substantial; Centeno likens it to the total wars
fought in early modern Europe. He writes that the war’s “length, intensity
of passion, logistical challenges, and consequences… (have) no equal” in
Latin American history. It was “the one dog of war that definitely did
bark” (Centeno, 2002, p. 56). Moreover, Argentina and Brazil were
enmeshed in an ongoing strategic rivalry, which Thies (2005) maintains
should have prompted them to deepen revenue extraction.7 Given that
these countries were embroiled in geopolitical rivalry and that they partici-
pated in the region’s most formidable war, the coming analyses approxi-
mate crucial case studies to assess the veracity of the link between geopolitical
competition and the development of extractive capacity in Latin America
(Eckstein, 1975).
40 R. SAYLOR
The War of the Triple Alliance began when Paraguay’s leader, Francisco
Solano López, encroached onto Uruguayan territory and provoked Brazil
to declare war to defend its allies in Uruguay’s Colorado Party. Argentina
entered the war alongside Brazil and Uruguay when Solano López moved
his troops into Argentinian territory to gain a strategic advantage. The war
dragged on for six years and wreaked devastation on Paraguay. The War of
the Triple Alliance was costly for Argentina and Brazil too. Argentina sent
25,000 men into battle and suffered 18,000 casualties, as well as 5000 killed
from internal conflicts and another 7000 in related cholera deaths. The war
directly or indirectly killed more than 1.5% of Argentina’s population. The
Economist estimated that the war cost Argentina £9.3 million, more than
100% of the country’s foreign trade value circa 1860. Brazil sent around
1,30,000 soldiers to fight Solano López and probably suffered 1,00,000
casualties. Brazil’s financial cost was also great: more than £56 million, more
than double its foreign trade circa 1860 (Centeno, 2002, pp. 54–56, 228;
McLynn, 1984; Platt, 1983, p. 46; Warren, 1978, p. 30).
The ferociousness of the war required a quick mobilization of resources
that easily outstripped the states’ ordinary revenues. Argentina and Brazil
funded their war-making in part with a combination of foreign and domes-
tic debt issues, and these actions created postwar fiscal strains. Yet, despite
the financial toll imposed by the war, neither Argentina nor Brazil took
steps to reach deeper into society to extract revenue for fiscal balancing. I
argue that the relative indifference to the war’s financial implications was
a function of the political dominance of each country’s debtor class of
landed elites.
4 Debtor Ranchers in Argentina

Refuse a Fiscal Overhaul
The War of the Triple Alliance marked Argentina’s first substantial growth
of long-term public debt. In some ways, the war affirmed aspects of bellicist
theory: for example, afterward, Argentina began to professionalize its mili-
tary (Oszlak, 1982, p. 100 note 14). But the war had few fiscal ramifica-
tions. Argentina continued to rely on volatile trade duties for revenue, even
as macroeconomic problems grew. I attribute the lack of fiscal institution
building to the preferences of the export-oriented cattle and sheep ranchers
(estancieros) in Buenos Aires province, who dominated the ruling political
coalition. The estancieros “were unusually dependent upon foreign com-
munities for capital… hence they were a debtor class” (Ferns, 1960,
pp. 144–145; see also Sabato, 1990, pp. 243–274). British merchants were

their main source of credit and the country’s net creditors (Reber, 1979).
Merchants were stronger in Argentina than most elsewhere in Latin
America (López-Alves, 2001, pp. 158–159). Merchants and other British
investors also purchased much of Argentina’s public debt directly or indi-
rectly through firms such as Baring Brothers (Ferns, 1960, pp. 327–328,
439–442). In general, the estancieros and British merchants had a symbi-
otic relationship that centered on foreign trade. But sometimes they clashed
over monetary and fiscal policy (Reber, 1979, pp. 19, 29).
The War of the Triple Alliance followed a decade of momentous change
in Argentina. From 1852 to 1862, “Argentina” was divided between the
Buenos Aires provincial government and the Argentine Confederation, a
rival conglomeration of the country’s other provinces. An 1857 global
wool boom destabilized this precarious status quo. Estancieros in Buenos
Aires felt that they were losing out to upstart ranchers in the Confederation,
so they moved to militarily subdue them in order to maintain their
supremacy (Saylor, 2014a, pp. 98–102). Ranchers also had a growing
appetite for credit because sheep raising was more capital-intensive than
cattle ranching (Sabato, 1990, pp. 243–274).
After reunification, the monetary system was in disarray. A variety of
currencies circulated, and between 1859 and 1861, the Buenos Aires gov-
ernment had nearly doubled the money supply. The peso corriente, the
nonconvertible currency used for everyday transactions, was virtually
worthless. (It circulated alongside the metallic peso fuerte.) In early 1863,
merchants lobbied the Treasury Minister, Dalmacio Vélez Sarsfield, for
monetary stabilization (Scobie, 1954, pp. 37–38). He declared that the
“nation has a first order interest to avoid ruin” of the paper peso. The
government retired the now-defunct Confederation’s floating debt, gave
the Banco de la Provincia de Buenos Aires exclusive note-issuing privileges,
and contracted the money supply by 10% (Cortés Conde, 1989, pp. 19–30,
Vélez Sarsfield quote from p. 29).8 Like the monetary situation, the fiscal
system was disorderly: “The tax collection apparatus… was weak and scat-
tered… with incompetent personnel” (Oszlak, 1982, p. 194). In 1863,
trade duties made up 94% of state revenue (Oszlak, 1982, pp. 204–205).
Argentina had weak fiscal institutions.
The War of the Triple Alliance and its aftermath illuminated the differ-
ing visions for monetary and fiscal policy by Argentina’s net debtors and
net creditors. Argentina began the war with its budget more or less bal-
anced, but the war began an era in which the state took on debt to run
42 R. SAYLOR
deficits (Platt, 1983, p. 33).9 Argentina partly financed the war with a
£2 million bond issue through Baring Brothers in 1866 and 1868, which
accounted for 20% of the war’s expenses. It was “subscribed, chiefly for
investment among merchants and capitalists connected with Argentina.”10
The war began a penchant for debt financing, as the central state and
Buenos Aires provincial government acquired more than £9 million more
in public debt between 1870 and 1873 (Marichal, 1989, pp. 93–94, 243).
During the war, the government halted the valorization of the peso. The
monetary situation had stabilized, but as the peso gained value, money
became tight. The estancieros’ advocacy group, the Sociedad Rural
Argentina, argued in 1866 that an appreciating peso “ruined the country’s
source of wealth: the countryside” and would mean the estancieros’ “inevi-
table” ruin “in short time.” By contrast, La Nación, a mouthpiece of mer-
cantile interests, desired further strengthening to promote imports, the
more valuable part of Argentine trade. (Imports always outpaced exports
between 1861 and 1875.) To stop valorization, the estancieros sought an
official peg, which they received in 1867 with the formation of the Oficina
de Cambios (Chiaramonte, 1971, pp. 57–61; Panettieri, 1980,
pp. 389–393).11 Yet, despite the peg and chronic trade deficits, the money
supply expanded considerably during the war—from 316 million to
583 million paper pesos—because Argentina helped supply the Brazilian
army, and the influx of Brazilian capital enabled emissions from the Oficina
de Cambios. In addition, the Banco de la Provincia de Buenos Aires started
issuing (and the state began accepting) metallic notes in 1866 (Cortés
Conde, 1989, pp. 42, 47–50, 94; Panettieri, 1980, pp. 392–394).
Monetary policy thereby facilitated the estancieros’ economic goal: to access
credit for wool production (cf. Sabato, 1990, pp. 255–262). Meanwhile,
fiscal policy remained centered on trade duties, which accounted for 95% of
ordinary income during the war (Oszlak, 1982, pp. 204–205).
After the war, monetary policy continued to favor the estancieros. In
1872, the government established a mortgage bank in Buenos Aires prov-
ince. The bank issued interest-bearing letters of mortgage credit (cédulas),
which functioned like a revolving line of credit, encouraged land specula-
tion, and promoted inflation (Ferns, 1960, pp. 370–371). In addition, the
Banco de la Provincia de Buenos Aires, which was not bound by the Oficina
de Cambios’ peg, continued expanding the money supply. La Nación
objected, to no avail (Cortés Conde, 1989, pp. 82–84).12 But when peace-
time ended the influx of Brazilian capital, Argentina’s chronic trade defi-
cits quickly depleted the Oficina de Cambios’ metallic reserves, from
$F15 million (pesos fuertes) in 1872 to less than $F3 million in 1875
(Panettieri, 1980, pp. 392–394). The government exhausted its reserves

shortly thereafter and made its quarterly debt payment in June 1876 with
paper pesos (not gold). It avoided default by securing a short-term loan
from Baring Brothers (Ferns, 1960, p. 380; Marichal, 1989, p. 105).
Convertibility was suspended in 1876, and the paper peso lost more than a
quarter of its value by the end of the 1870s (Panettieri, 1980, pp. 394–395).
Argentina was facing an economic crisis, which greatly worried the
country’s net creditors. The paper peso depreciated by about 20% in the
months immediately following the end of convertibility (Panettieri, 1980,
p. 395). Inflation accelerated (della Paolera & Taylor, 2001, pp. 13–14).13
British capitalists were most exposed to these problems; indeed, “currency
depreciation threatened the profits of import-export merchants far more
than any government device to raise revenue” (Reber, 1979, p. 29). British
investors also held lots of public and railroad debt: about 80% of all British
investment in Argentina pivoted on the government’s ability to repay
them (Ferns, 1960, pp. 327–328). Yet the state’s fiscal foundation seemed
increasingly precarious. Consider three changes between the years
1865–1869 and 1870–1876. Argentina’s budget deficits as a proportion
of exports doubled. The share of debt service to overall expenditures grew
from 21% to 38%. And perhaps most important, debt service as a propor-
tion of state revenues increased from 28% to 61%.14
In 1875–1876, policymakers debated remedies to the fiscal crisis. The
two main proposals were raising import duties or suspending debt pay-
ments (Chiaramonte, 1971, pp. 112–116, 181–203). Argentina’s net
creditors were frustrated that significant fiscal diversification and taxes on
landed wealth were nonstarters. La Prensa, a newspaper sensitive to British
interests, questioned the logic of proposals to raise import duties while
lowering export duties. It argued that exporters were better able to absorb
higher taxes than were consumers, who bore the brunt of import duties.15
The Times (London) was blunter, arguing that the problems caused by
revenue shortfalls would not abate “unless the capacities of the country to
bear internal taxation…can be extensively brought into play to fill up the
deficiency.” Merchant firms in Liverpool, London, and Manchester pub-
lished a letter alongside the editorial and advocated more internal taxa-
tion, because “the Argentines, as a nation, [are] a very lightly taxed
people.”16 Yet, policymakers were not persuaded. They raised import
duties and added some taxes on consumer goods but left landed wealth
untouched (Cortés Conde, 1989, pp. 117–120). The estancieros had
“managed to paralyze” such desires (Oszlak, 1982, p. 214). The state’s
fiscal configuration did not change remarkably.
44 R. SAYLOR
Policymakers reaffirmed this orientation a few years later. In 1880–1881,

the budget deficit widened, despite growing exports, which sent President
Roca scrambling for short-term financing (Cortés Conde, 1989, pp. 147,
149–154). Rather than diversify taxes, the government initiated a bonds-for-
land swap with estancieros. Ranchers loaned the government money as a stop-
gap and later redeemed their bonds for 20 million hectares that the state was
then adding to the national domain through the “Conquest of the Desert”
(the subjugation of Indian tribes in southern Argentina). The state received
some “one-off” revenue, but not a new perennial tax, while the estancieros
added massively to their landholdings (Oszlak, 1982, pp. 214–215). Rodolfo
Ortega Peña and Eduardo Luis Duhalde (1968, pp. 186–187), in their his-
tory of Baring Brothers in Argentina, conclude that the bond program was
how the government guaranteed its foreign debt payments.
The predilection for debt financing accelerated in the 1880s. As ranchers
were taking part in the bonds-for-land swap, they were deepening their
position as debtors through the growing use of cédulas, the letters of mort-
gage credit. Much of the financing for these mortgage bonds came from
unsuspecting British subscribers (Ferns, 1960, pp. 370–371). Gerardo della
Paolera and Alan Taylor (2001, p. 58) characterize the 1880s as “at worst…
a highly leveraged government-backed Ponzi scheme.” In the 1890s,
Argentina experienced the Baring Crisis, two attendant defaults, massive
inflation, and currency depreciation. Yet, the decade was a boon for estan-
cieros, as “public funds (had become) a favored instrument for private accu-
mulation” (Marichal, 1989, pp. 139–170, quote from p. 158). Through it
all, the fiscal apparatus remained flimsy. Some new taxes in the 1890s tar-
geted foreign firms and workers, through taxes on alcohol, for example. But
estancieros remained shielded (Oszlak, 1982, pp. 204–205; Schwartz, 1989,
pp. 217–221). In sum, Argentina did not lack stimuli for fiscal develop-
ment: the country fought a grand war, took on lots of debt, and scarcely
taxed key portions of the economy. And there were vocal advocates for fiscal
reform. They simply lacked the political strength to propel much change.
5 Coffee Planters in Brazil Foil

Fiscal Development
As in Argentina, the War of the Triple Alliance led to a significant growth
of long-term public debt in Brazil. But despite the associated fiscal pres-
sures, Brazil did little to enhance its extractive capacity, choosing to rely
instead on volatile trade duties. Before the war (1850–1863), the Brazilian
state obtained 79% of its ordinary revenues on average from customs
duties and royalties. After the war (1871–1886), customs and royalties
averaged 72% of ordinary revenue (Abreu & Lago, 2001, pp. 343–344). I
attribute this fiscal stasis to the interests of Brazil’s coffee planters, a group
of net debtors who were the most powerful force in the country.
Brazil’s landed elites “exercised clear authority in most political deci-
sions.” Neither merchants, nor other urban interests, nor the masses were
significant checks on their power (Graham, 1990, p. 138). The most power-
ful landowners were export-oriented coffee planters, who hailed from Rio
and São Paulo provinces. (Coffee was by far Brazil’s largest export after
1850.) Other exporters producing sugar, cotton, and rubber in the northeast
provinces of Bahia and Pernambuco were less influential. Generally, export-
oriented actors tended to the Conservative Party, which predominated in the
mid nineteenth century. Liberal Party members had less of an export orienta-
tion (Needell, 2013, pp. 81–82). In the credit market, coffee planters were
net debtors (Stein, 1958, pp. 240–244; Summerhill, 2015, pp. 205–206).
Domestic merchants and purchasers of Brazilian debt in the London bond
market were the country’s net creditors (Summerhill, 2015, pp. 7, 12, 99).
Coffee planters and merchants had a largely harmonious relationship,
although “the financial system was the most hotly contested area in the
struggle among competing domestic interests” (Topik, 1987, p. 27).
Brazil financed the War of the Triple Alliance with foreign and domestic
debt issues and monetary expansion. The main foreign loan was a £7 million
debt issue in 1865, facilitated by N. M. Rothschild & Sons of London,
Brazil’s de facto foreign banker. The government also issued foreign debt
in 1863, to convert short-term obligations into long-term debt in anticipa-
tion of war, and again in 1871, partly to cover budget deficits. Brazil’s
foreign debt increased by 65% during the 1860s (Summerhill, 2015,
pp. 48–54, 62, 67). Domestic bonds, known as apólices, were an even larger
part of the war’s financing. In most years, apólice issues augmented the gov-
ernment’s ordinary revenues by 10–30%; the single largest offering, in
1868, equaled 65% of ordinary revenues. The main buyers of domestic debt
were merchant firms and commercial banks in Rio, as well as the Banco do
Brasil.17 These wartime domestic bonds accounted for 40% of all domestic
debt issues during the Empire (1822–1889). By the war’s end, Brazil’s
debt-to-exports ratio had more than doubled (Abreu & Lago, 2001,
pp. 358–359). Finally, the government also expanded the money supply;
46 R. SAYLOR
new currency emissions made up 30% of wartime financing (Abreu & Lago,
2001, p. 351; Summerhill, 2015, pp. 82–94, 99–104; Topik, 2002, p. 130).
The number of milréis in circulation increased from 29 million to 151 mil-
lion between 1864 and 1870 (Centeno, 2002, p. 132).
Following the war, the politics of debt came to the fore, because debt
service obligations became the state’s second largest expense, after mili-
tary costs (Levy, 1995, p. 227; Summerhill, 2015, p. 36).18 The war’s
funding strategy was having negative economic effects: the milréis depre-
ciated by about 25% during the war (Levy, 1995, p. 252). To address the
situation, Brazil appeared to be developing a nascent fiscal state. During
the war, the government implemented new taxes on public employees,
stamped paper, property, and industrial and professional activity
(Summerhill, 2015, pp. 42–44, 82). But in actuality, the “tax on industry
and the professions was never enforced and the rates remained minimal,”
and rural properties were excluded from the building tax (Centeno, 2002,
p. 118 note 46). The fiscal apparatus remained simple and undiversified.
Much like before the war, Brazil obtained 73% of its ordinary revenues in
the 1870s from trade duties; most of the rest came from “interior taxes,”
although these seemingly direct taxes were largely duties placed on com-
mercial flows (Abreu & Lago, 2001, pp. 343–344). Land taxes were non-
existent (Leff, 1997, p. 53). Brazil’s ballooning public debt did not
stimulate fiscal development.
This fiscal profile benefitted coffee planters. First, the government’s
main revenue source was import duties, which were passed along to
consumers and fell most heavily on urban residents. Second, export

duties—which constituted 17% of ordinary revenues on average during the
1870s—had distributive implications that favored coffee planters. By the
early 1880s, Brazil was responsible for about 60% of global coffee produc-
tion (Calomiris & Haber, 2014, p. 407). Brazilian production was large
enough to alter world prices, which enabled Brazilian planters to pass along
export duties through higher prices (Williams, 1994, p. 20). Hence, coffee
planters in Rio and São Paulo achieved a relative gain on export taxation
vis-à-vis cotton, rubber, and sugar producers from the northeast, who
absorbed their export duties. Third, planters did not face land or income
taxes (Abreu & Lago, 2001, pp. 342–344). Fourth, the use of debt to fund
budget deficits meant that taxes could remain low (Topik, 1985, p. 207).
These policies did not fundamentally change during the nineteenth cen-
tury (Abreu & Lago, 2001, pp. 340–349; Calomiris & Haber, 2014,
pp. 413–414; Topik, 1985, pp. 210–212).
Brazil’s net creditors—the commercial, financial, and mercantile

communities—disagreed with fiscal policy. They opposed the regressive
tax structure. For example, in 1879 the Commercial Association of
Pernambuco said that direct taxes were “more just, proportional, and fair”
(Ridings, 1994, p. 178). Commercial groups also disliked interprovincial
tariffs because they stifled economic activity (Ridings, 1994, p. 183). At
times, the Liberal Party advocated a land tax in order to diversify revenues.
The Rio News, an outlet for commercial interests, endorsed the proposals.
So too did commercial associations in Bahia and Pernambuco provinces
(Ridings, 1994, p. 195; Schulz, 2008, pp. 56, 143). In 1888, the Rio
News wrote that “It must be patent to the most superficial observer that
duties have reached a maximum, and some new sources of revenue must
be discovered. To impose upon one class, the merchants, the obligation to
support a class notoriously improvident, and to a considerable extent
loaded with debt, is a gross injustice. Let the planter contribute something
… to relieve the country” (quoted in Schulz, pp. 55–56).
The attitudes of coffee planters prevailed on fiscal policy. And yet, mon-
etary policy did not seem to support planters’ interests, because it was
generally tight, noninflationary, and limited credit availability (Sweigart,
1980, pp. 125–130; Topik, 1985, pp. 206–207; Villela, 1999, chapters 5
& 6). Monetary policy appeared to work against debtors and exporters,
who can benefit from loose money, inflation, and abundant credit. In fact,
there is evidence that planters wanted looser monetary policy (Schulz,
2008, pp. 51–52; Topik, 1985, p. 206).19 But Richard Graham (1990,
p. 266) notes that planters’ opposition to tight monetary policy was
“vaguely expressed and contradictory.” Part of this inconsistency stems
from the diversity among planters: some of the most affluent planters
favored monetary conservatism because they acted as moneylenders and
held apólices; that is, they were net creditors (Topik, 1985, p. 206, note 9).
A fundamental reason planters reconciled themselves to tight monetary
policy was due to their fear of smallholding coffee producers. For large
planters, smallholdings would drain labor from their plantations, raise
credit demand, and weaken their position in Brazilian society (cf. Leff,
1997, pp. 37–40). Loose monetary policy, because it implied easier credit,
would assist the formation of small farms. So planters took steps to pre-
vent it. They opposed cadastral surveys to map transparent property rights,
because insecure property titles inhibited credit access (Dean, 1971,
pp. 611, 615).20 Coffee planters endorsed laws that forced new landown-
ers to document they had acquired their land through inheritance or
48 R. SAYLOR
grant; otherwise the government could seize the land. Moreover, people
wanting to obtain frontier lands had to pay for them upfront in cash
(Calomiris & Haber, 2014, pp. 407–408). The government’s control over
banking and note issuance rendered this option unrealistic for would-be
yeomen (Summerhill, 2015).
The effect of these actions was to limit credit availability. Credit was
fairly expensive, and most planters were indebted, many quite heavily
(Stein, 1958, pp. 240–244; Sweigart, 1980, pp. 109–169). Yet at the
same time, coffee planters had ample legal protection, which made fore-
closure difficult and enabled chronic indebtedness (Ridings, 1994,
pp. 144–145; Stein, 1958, pp. 241–242). The government also tried to
direct credit to planters. In the 1850s, the government formed the Banco
do Brasil by conglomerating the handful of existing commercial banks; it
functioned like a government-run bank (Calomiris & Haber, 2014,
pp. 409–413; Schulz, 2008, pp. 28–30). During the War of the Triple
Alliance, the state authorized the bank to make mortgage loans. The
Banco do Brasil became the country’s leading mortgage lender and used
mortgage bonds (similar to cédulas in Argentina) that did not require
securitization. Mortgage loans went mostly to large coffee planters
(Summerhill, 2015, pp. 188, 193; Sweigart, 1980, pp. 138–147). By the
late-1870s, the Banco do Brasil was effectively bailing out chronically
indebted coffee planters (Stein, 1958, pp. 244–245).
These actions redistributed wealth from Brazil’s net creditors to its
debtor coffee planters. Brazil’s bifurcated credit market had two sets of
creditors. Foreign merchant firms and the London bond market purchased
Brazil’s external debt. Merchant and commercial groups based in Rio, as
well as the Banco do Brasil, bought domestic bonds. The Banco do Brasil
was the crucial intermediary. The bank lent mostly to coffee plantation
areas, such as Rio or São Paulo; it did not direct mortgage funds to sugar-
producing areas, for instance. Thus, the Brazilian credit market was one in
which the government issued debt and then funneled part of the proceeds
as credit to coffee planters via the Banco do Brasil. William Summerhill notes
that Brazil’s tight monetary policy contributed to its favorable standing in
the London bond market—unlike most Latin American countries—and
facilitated foreign loans. He writes that “the Treasury borrowed cheaply in
London and passed along the savings to private debtors through Brazilian
banks” (Summerhill, 2015, pp. 183–185, 204–207, quote from p. 207).
This status quo changed with the abolition of slavery in 1888, when
Brazil’s reluctance to end slavery became unsustainable. To compensate
coffee planters for higher anticipated labor costs, the government injected
massive amounts of credit and money into the economy. This plan, known
as encilhamento (saddling up), “raised a dramatic protest” in the Rio News,
which voiced creditor attitudes (Schulz, 2008, p. 75). The ensuing cur-
rency depreciation did not threaten coffee planters. In the short term,
depreciation begot lower world coffee prices, given Brazil’s dominant
world market position; in the longer term, depreciation meant rising costs
of real-denominated facets of production. But declining world prices off-
set the lower value of the milréis (Abreu & Lago, 2001, p. 348). Because
planters’ production costs were more tied to the milréis than foreign cur-
rencies, compared with nascent manufacturers, depreciation was “essen-
tially a socialization of losses whereby the rest of society subsidized
exporters” (Topik, 1987, p. 35). Between 1888 and 1894, the milréis
deteriorated from its par value of 27 milréis-to-pence to 10.6 milréis-to-
pence. Debt service consumed more than half of the federal budget by the
late-1890s (Schulz, 2008, pp. 71–97, 143–144; Topik, 1987, pp. 27–40).
Even so, Brazil’s fiscal profile did not change significantly. The prob-
lems of the 1890s did spur new excise taxes on alcohol and tobacco. Yet,
like the emphasis up to then on import duties, which fell most heavily on
urban consumers, these new taxes were also regressive. Thus, the excise
remained consistent with prevailing fiscal policy. A proposed income tax
was deemed “uncollectable” and scuttled by Congress at the turn of the
century (Schulz, 2008, p. 143). There was neither substantial fiscal diver-
sification nor institutional strengthening. The “state barely trespassed
onto the plantation” (Topik, 2002, p. 125). Local administration effec-
tively lay with police chiefs, delegados, and subdelegados, who were local
powerbrokers, not bureaucratized state agents (Graham, 1990, pp. 55–70).
These outcomes reflected the interests of the coffee planters, who had a
variety of reasons to resist the development of a fiscal state.
6 Conclusions
Net debtor coalitions in Argentina and Brazil helped ensure fiscal under-
development during their countries’ formative state building eras. The
prospect of inflation, which can be tamed by diversified and robust tax
institutions, was unthreatening to ruling coalition members. In general,
the absence of net creditor coalitions throughout Latin America fore-
stalled institutional development, in contrast to European polities such as
England and the Netherlands, where net creditor coalitions built fiscal
50 R. SAYLOR
states. The result in Latin America was dependence on easy-to-obtain rev-

enues and fiscal institutional weakness.
This chapter strives to make three interrelated points. First, one cannot
fully understand why contemporary Latin American states have lackluster
extractive capabilities without appreciating the long-term historical forces
that obstructed their development. Second, as a capital-poor region, coun-
tries in Latin America were unlikely to have strong domestic creditors,
because they obtained much of their capital abroad. This structural condi-
tion influenced the type of ruling coalitions that would prevail, to the detri-
ment of fiscal capacity building. Third, the creation of strong tax institutions
is not a functional outgrowth of war or economic growth. Rather, fiscal
development is a deeply political process. There were creditors clamoring
for fiscal diversification and institutional strengthening in Argentina and
Brazil, but they were relatively powerless. Thus, most Latin American
countries relied on trade flows not simply because they are easy to tax, but
because of the distributive implications of those policies. Prevailing political
coalitions in nineteenth-century Latin America had few reasons to initiate
the costly and uncertain process of building a fiscal state, so they did not.
Notes
1. There is growing interest in the rise of fiscal states in Europe and elsewhere
(see Bordo & Cortés Conde, 2001; Cardoso & Lains, 2010; Dincecco,
2011; Yun-Casalilla & O’Brien, 2012).
2. The main alternatives to debt financing, such as monetary expansion and
currency debasement, have similar effects.
3. I developed this thesis with Nicholas C. Wheeler (Saylor & Wheeler, 2017).
4. See Saylor and Wheeler (2017) for a case study of how a net-creditor coali-
tion in eighteenth-century England spurred fiscal development.
5. At the same time, Chile was beset by bellicist pressures. In the nineteenth
century, Góngora (1986) considers Chile to have been a “land of war,”
while Resende-Santos (2007, p. 156) characterizes it as “perennially inse-
cure.” Centeno (2002, pp. 44–45) counts three interstate and four civil
wars during the century; I would add Chile’s 1859 insurrections to
Centeno’s list (Saylor, 2014a, pp. 82–83). Last, Thies (2005, p. 457) iden-
tifies three external rivalries for Chile during the nineteenth century.
6. Soifer (2015, p. 171, Table 5.5) notes that Mexico’s “land value tax, the
contribución predial, was collected only in Mexico City and the federal
territories.”
7. Argentina was also part of a strategic rivalry with Chile, and Brazil had a
rivalry with Great Britain (Thies, 2005).
8. Estimates of the money supply vary, but everyone agrees that it contracted
during 1862–1865. Chiaramonte (1971, p. 58) estimates the money sup-
ply was 340 million paper pesos in 1862. Cortés Conde (1989, p. 42) cal-
culates that it contracted to 305 million pesos by 1864. They agree the
money supply was 298 million pesos in 1865. Adelman (1995, p. 245)
calculates a starker contraction from 378 million paper pesos in 1862 to
230 million by 1865.
9. Argentina’s only outstanding foreign debt before the war was its 1824
loan, which had been in default but was rescheduled in 1857 (Ferns, 1960,
pp. 319–320).
10. The state funded the remaining war expenses by issuing promissory notes to
military men and borrowing from the Banco de la Provincia de Buenos Aires
(Platt, 1983, pp. 33–40, quote from p. 37; Marichal, 1989, pp. 92–93).
11. The peg was 25 paper pesos to one peso fuerte. Adelman (1995, p. 245) and
Reber (1979, p. 32) note that the growing scarcity of paper pesos bothered
merchants too.
12. Ranchers were prominent among the directors of the Banco de la Provincia de
Buenos Aires and the provincial mortgage bank (Sabato, 1990, pp. 273–274).
13. There had been a modest rise in price indices under the convertibility regime.
14. Calculations based on data from Chiaramonte (1971, pp. 38–39, 90), Cortés
Conde (1989, pp. 33, 86, 112), and Oszlak (1982, pp. 204–205, 262).
15. La Prensa, September 23, 1875 (vol. 6, no. 1618) and July 27, 1876 (vol. 7,
no. 1864).
16. The Times, March 16, 1876, Issue 28,578, p. 7.
17. These buyers in turn sold some debt on the secondary market, to individu-
als, other banks, joint stock companies, and religious organizations
(Summerhill, 2015, p. 105).
18. Debt service constituted 14% of Brazil’s budget in 1860. It rose to 27% in
1870 and to 34% in 1880 (Schulz, 2008, p. 144).
19. Brazil’s net creditors feared inflation and currency depreciation and wanted
tight money (Ridings, 1994, pp. 140–143; Topik, 1985, p. 207).
20. In addition, cadastral surveys would have created tension between land-
owners over boundary definition and facilitated land taxes.
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Coffee Factors of Rio de Janeiro, 1850–1888. Unpublished doctoral dissertation,
University of Texas at Austin.
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& R. Cortés Conde (Eds.), The Cambridge Economic History of Latin America
(Vol. II, pp. 57–100). Cambridge: Cambridge University Press.
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Journal of Political Science, 49(3), 451–465.
Tilly, C. (1992). Coercion, Capital, and European States, AD 990–1992.
Cambridge, MA: Blackwell.
Topik, S. (1985). The State’s Contribution to the Development of Brazil’s Internal
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Topik, S. (1987). The Political Economy of the Brazilian State, 1889–1930. Austin:
University of Texas Press.
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Building in Brazil in the Nineteenth Century. In J. Dunkerley (Ed.), Studies in
the Formation of the Nation State in Latin America (pp. 112–132). London:
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History 1500–1914. Cambridge: Cambridge University Press.
CHAPTER 3
State Capacity and Development: Federalism

and Tax in Brazil
Aaron Schneider
1 Introduction
Brazil collects around 36% of GDP in tax, among the highest levels in the
developing world, and above the level of a number of developed countries.
This impressive level of tax occurs within the context of a complex and
changing federal system. Over time, tax collection and federalism have
been marked by moments of significant and coincident changes, as fiscal
and federal arrangements are reset to accommodate rival elite and popular
interests. Such interests shift with new patterns of international insertion,
requiring renegotiations of fiscal and federal bargains to distribute power
and resources within a federation and expand the amount of revenue avail-
able to meet new developmental challenges. As an emerging democratic
power that has experienced periods of rapid development punctuated by
reversals of dictatorship and decline, the intertwined history of Brazilian
federalism and tax is essential to understand.
Brazilian history demonstrates both the close relationship between fed-
eralism and tax as well as their utility as indicators of state capacity to
promote development. The current high level of taxation coincides with a
reorganization of federalism that occurred during the 1990s, and efforts
A. Schneider (*)
Josef Korbel School of International Studies,
University of Denver, Denver, USA

DOI 10.1007/978-3-319-60119-9_3
58 A. SCHNEIDER
to undertake further reforms have been impossible without a simultane-

ous reworking of federalism and tax. Of interest for other developing and
middle-income countries, the Brazilian experience confirms that success-
ful development requires state capacity, and the required capacities vary
with the way developing countries fit into the international economy.
When Brazil depended on agricultural exports, it required a different set
of state capacities from those required for import-substitution industrial-
ization, which are further different from the capacities required for com-
petition in a liberalized global political economy.
To trace shifts in Brazilian state capacity, the current chapter is organized
around four historical periods. Each period is defined by patterns of inter-
national insertion—agricultural export, import-substitution industrializa-
tion, industrial deepening, and adjustment. Such a division highlights the
main causal mechanism discussed here; renegotiation of federal and fiscal
bargains makes possible new state capacities for the purpose of promoting
new patterns of international insertion. Arriving at such bargains is never
straightforward, as international insertion strengthens some elite and pop-
ular actors and weakens others, complicating the task of reaccommodating
rival elites ensconced in regional jurisdictions. Fiscal federal bargains, when
successful, generate new revenues, new federal structures, and new state
capacities to support dynamic sectors within existing patterns of interna-
tional insertion. Failure, or decay, of fiscal federal bargains undermines state
capacity and complicates the ability to promote development and success-
fully manage international relationships.
The mix of social and fiscal variables considered here views public
finance as a window into larger social processes, which some have labeled
“fiscal sociology” (Martin, Mehrota, & Prasad, 2009; Schumpeter, 1917).
Specific attention to the revenue implications of federal arrangements
places the chapter in the literatures related to fiscal federalism (Oates,
1971). Together, the approach might be understood as “fiscal federal soci-
ology,” in which the character of social relations can be read in the fiscal
and federal bargains that define each time period. The sections that follow
concentrate on two characteristics of each period: the social relations trig-
gered by international insertion and new fiscal federal relations as expressed
in tax and federal institutions. To begin, it is useful to consider the social
implications of international insertion and fiscal federal bargains.
STATE CAPACITY AND DEVELOPMENT: FEDERALISM AND TAX IN BRAZIL 59
2 International Insertion: Rising and Falling

Elite and Popular Sectors
Particular attention is given here to the way in which class structures of
semi-peripheral economies like Brazil’s are shaped by the international
system. Approaches that highlight the link between external insertion and
internal social dynamics include a variety of world systemic and structural
approaches, highlighting the “uneven and combined” nature of develop-
ment in an integrated capitalist world, in which the challenges of catching
up shift over time for late developers (Gerschenkron, 1962).
As elites adapt to new patterns of international insertion, they rise in
wealth and influence, and seek to adapt state policies and institutions to
further their dynamism. At the same time, they encounter declining elites
accustomed to previous patterns of international insertion, many of
whom are ensconced in preexisting institutions, which they use to protect
their privileges. Furthermore, while popular sectors have tended to be
constrained in the limited democracies of peripheral countries, certain
patterns of international insertion require their labor and land, increasing
lower-class leverage (Collier, 1999) or making them indispensable allies
for the victory of one or another elite aspirant to power (Reuschemeyer,
Stephens, & Stephens, 1992).
3 Mediating State–Society Relations:

Fiscal Federal Bargains
As international insertion prompts shifts in social relations, state institu-
tions mediate rising and falling fortunes. In Brazil, two closely related
state institutions filter social relations: tax and federalism. The literature on
fiscal federalism has long argued for a close relationship between tax and
federalism, and each has been treated by a rich tradition of theoretical lit-
erature on the nature of extraction and territorial organization of author-
ity (Oates, 1971).
Considerations of tax capacity and tax structure, especially those
drawing on fiscal sociological traditions, position tax as an indicator of
state capacity (Fairfield, 2014). Tax is ultimately a question of consent
and coercion (Brautigam, Fjeldstad, & Moore, 2008)—the ability of
government to convince contributors to part with some of their resources
willingly, and impose extraction when they are not willing (Levi, 1988).
Some have argued that there is room for governments to expand revenues
60 A. SCHNEIDER
ithout societal approval, using “fiscal illusions” to hide the amount

w
extracted (Buchanan & Wagner, 1977) or sustain themselves with non-tax
revenues, such as through natural resource rents (Ross, 2014). Still, such
revenue streams are poor tools for state capacity over the long term, as
natural resource prices fluctuate and illusions are eventually exposed
(Moore, 2004). Taxation reflects, at least in part, the ability of states to
mobilize societal revenues.
The current chapter pays particular attention to tax as an indicator of
state–society relations (Schumpeter, 1917). How much revenue a state
generates, through what bases, and from whom, depends critically on the
ability of state actors to secure a political agreement around government
priorities and overcome collective action constraints of potential free riders
(Lieberman, 2003). Tax implies a shared sacrifice in which contributors
forego private consumption to allow states to pursue public goods. To the
extent that long-term and significant increases in revenues represent
efforts to use state capacity to promote late development, they require
political bargains among various rising and falling elite and popular sectors
(Brautigam, Fjeldstad, & Moore, 2009).
The language of bargains is also the way observers describe federal sys-
tems, which represent bargains among the potentially rivalrous leaders of
territorial jurisdictions (Hamilton, Madison, & Jay, 1961). Federal agree-
ments have been framed as efforts to come together around collective
objectives, such as defense or a national market (Riker, 1964), or hold
together a larger unit at risk of fragmentation, such as after decolonization
or in the face of ethnic and internal diversity (Stepan, 2000). More so than
tax, federalism is often an elite affair. Parties to federal agreements are
often territorial leaders, and conflicts do not necessarily imply that citizens
of different jurisdictions understand themselves to be at odds. Still, even
federal bargains must be justified to citizens, especially when regions and
levels of government forego some of their power and resources in pursuit
of shared and collective objectives (Snyder, 2004). In striking bargains
among territorial leaders and delegating authority across jurisdictions and
between levels of government, federal bargains allow the state to penetrate
a territory (Ziblatt, 2008). In this way, successful federal bargains are
essential to the “infrastructural power” of the state to promote develop-
ment (Mann, 1984).
Fiscal bargains and federal bargains come together in what might be
termed fiscal federal bargains. Such bargains grant subnational units the
authority to collect revenues from certain tax bases, while other revenue
streams are mobilized at the national level. Transfers manage imbalances

horizontally across subunits and vertically between the national and local
levels. Successful fiscal federal bargains represent pacts that operate both
among the potentially rivalrous leaders of different regions and levels of
government as well as rising and falling social sectors excited by new inter-
national insertions.
Fiscal federal bargains are ultimately challenges of state-building, in
which regional elites dubious of central government credibility have to
accept greater national resource mobilization in exchange for the guaran-
tee that revenues will be shared among heterogeneous units and unequal
levels of government. In federal countries like Mexico, it was the emer-
gence of a centralized national party, the PRI, organized along a corporat-
ist basis, that provided the credibility subnational elites were seeking
(Diaz-Cayeros, 2006).
New fiscal federal bargains are especially important at moments of
change in international insertion. Such moments provoke changing rela-
tions among social actors, and require new state capacities to sustain
dynamism and accommodate losers (Schneider, 2012). Expansions in
state capacity are associated with major changes in fiscal federal bargains.
A correlate is that disjunctures in fiscal federal bargains constrain state
capacity and reflect a lack of accommodation among social sectors. This
suggests two directions of change:
(1) Coincident reform occurs when both federal and tax institutions
change together, including a major advance in revenues and the
reorganization of federalism to complement new state capacities.
Such moments of coincident reform are rare and represent new
accommodations among social forces distributed across a country—
a new fiscal federal bargain. Such moments are rare for two reasons.
First, they are difficult, requiring broad bargains across highly varied
elite and popular sectors. Second, coincident reform is really only
possible and necessary at critical moments of transition between pat-
terns of international insertion, itself a rare occurrence.
(2) A second pattern of reform occurs when federalism shifts in ways that
undermine tax or tax shifts in ways that undermine federalism.
Federalism undermines tax when declining elites adapted to prior
patterns of international insertion ensconce themselves in regional
units and block expansions in state capacity as a way of protecting
their privileges (Gibson, 2012). One result can be that governmental
units end up “overfishing the common pool of national revenue,”
62 A. SCHNEIDER
thereby undercutting fiscal affairs (Rodden, 2006: xii). Alternatively,

tax undermines federalism when buoyant revenue bases favor cer-
tain regions over others or expand the state capacities of certain levels
of government over others (Arretche, 2012).
Fiscal federal bargains are therefore essential to state adaptations to new

international insertion. As international competition requires different
kinds of capacities depending on the nature of flows of goods and capital,
fiscal federal bargains must reaccommodate rival elite and popular sectors
with each new insertion in the international economy. Coincident fiscal
federal bargains expand state capacity and make possible rapid develop-
ment. Divergence between fiscal and federal bargains undermines state
capacity, and produces economic and political crisis.
This chapter therefore treats fiscal federal bargains as critical junctures in
which institutions are set and have long-term impacts. Coincident reforms
establish fiscal and federal bargains that have long-term impacts on state
capacity and therefore the ability to pursue development within a given
pattern of international insertion. The institutions set up at critical junc-
tures are also important because they hold within them the dynamics that
gradually produce divergent reforms, increasing federal imbalances and fis-
cal crises and ultimately undermining existing arrangements and forcing a
new international insertion, new state capacities, and new fiscal and federal
bargains. The following sections describe four historical periods defined by
shifting patterns of international insertion. For each period, the discussion
highlights the operation of coincident or divergent fiscal federal bargains.
4 Historical Periods

When one looks at the levels of tax as a percentage of GDP in Brazil since
the beginning of the twentieth century, a few breakpoints stand out. After
fluctuating around 10% of GDP during the Old Republic from 1891 to
1930, revenues crept upwards during the 1920s, and settled at a new bal-
ance between 15% and 20% until 1960. Several more years of fluctuation
followed until a moment of major reform under the military in 1967,
stabilizing taxes at a new platform around 25%, where they remained until
about 1980. After entering a period of fluctuation once again, a new
course upward was set after the 1988 Constitution and 1990s reforms,
stabilizing between 33% and 37% since the late 1990s. The figure below
shows the percentage of GDP collected in tax, with vertical lines indicat-
ing moments of significant change in the 1930s, 1960s, and 1990s.
40.00
35.00
30.00
25.00
20.00
15.00
10.00
5.00
0.00
1900
1905
1910
1915
1920
1925
1930
1935
1940
1945
1950
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
Fig. 3.1 Brazilian tax as a percent of GDP, 1990–2010
While four main periods characterize the evolution of tax, there are
slightly more moments of inflection within federalism, though still follow-
ing an episodic and punctuated pattern. In addition to the three moments
of change that characterize tax, the federal system was subject to two addi-
tional moments of adjustment with the return to democracy in 1945 and
the fiscal adjustment of the mid-1990s. The figure below offers one indi-
cator of change in the federal system: the relative proportion of total
receipts and expenses undertaken by the central government. While the
proportion of revenues enjoyed by the national government rose at first, it
dropped steadily during the Old Republic, especially expenditures. The
direction of change shifted with the Estado Novo, as the federal govern-
ment recuperated some of what it had lost, especially with respect to
expenditure. The return to democracy in 1945 shifted revenues away from
the center once again, though the central government preserved its pro-
portion of spending somewhat during the 1950s. The 1964 military
regime quickly went about re-centralizing both expenditure and revenues,
surpassing 75% of revenue and 60% of expenditure through the early
1980s, though the lead-up to the transition to democracy and the 1988
Constitution dropped the share of central government revenues and
expenditures once again, only to recuperate somewhat with the structural
adjustment of the mid-1990s and extending into the 2000s.
64 A. SCHNEIDER
80.00
75.00
70.00
65.00
60.00
55.00
50.00
45.00
40.00
1900
1904
1908
1912
1916
1920
1924
1928
1932
1936
1940
1944
1948
1952
1956
1960
1964
1968
1972
1976
1980
1984
1988
1992
1996
2000
Receipts % Expenditure %
Fig. 3.2 Relative central government share of receipts and expenditures, Brazil,
1900–2000
When federalism and tax shift together, as they did in the 1930s,
1960s, and 1990s, it suggests a simultaneous reworking of federal and
fiscal bargains—coincident reform. A social coalition accommodated ris-
ing elites associated with new patterns of international insertion and rival
elites clinging to fading sectors, occasionally with some inclusion also for
popular sectors. Divergent reform occurs more frequently, resting as it
does on intra-elite dynamics among regional leaders. The sections below
will explore periods of federalism and tax in terms of the social relations
they mediate between state and society.
5 Fiscal Federal Subnational State-Building

for Agricultural Exports
The fiscal federal bargain established in the Old Republic sustained an

agricultural-export economy, grafting a new federal pact atop the fiscal
structure inherited from the post-independence imperial period. While the
fiscal federal bargain held at first, there was a growing imbalance within
the federal system (dominated by a few large states), a fiscal system mal-
adapted to fluctuating export receipts, and a growing industrial and urban
economy poorly incorporated into existing institutions. This divergence
between fiscal and federal bargains exacerbated during the 1920s, bring-
ing to an end the Old Republic.
In 1889, a military coup removed the monarchy and the 1891

Constitution established a federal republic structured loosely around the
constitution of the United States. Thus, began the Brazilian Old Republic,
lasting until 1930 and characterized as the “period of the governors,” for
the clientelist dominance of agricultural export elites within the borders of
their states and a national government that was the plaything of a few
strong state-level leaders (Abrucio, 1998). The economy remained focused
on the export of primary products, with incipient industrialization mostly
an appendage to the export economy.
Governors were drawn together nationally in an “oligarchic pact,”
managing the federation as a concert of local regimes (Love, 1982: 8).
The federation held together as a loosely managed hierarchy, in which the
most powerful and populous states, São Paulo and Minas Gerais, effec-
tively chose the national president and left the choice of vice presidents to
secondary states, compensating smaller states with ministerial and admin-
istrative posts.
State governors were given control of the most important revenue
source, the tax on exports, which also tapped interstate trade, as well as
rural and urban property, industry, and professions. The central govern-
ment controlled taxes on imports, rights of entry, entry and departure of
ships, stamp taxes, and federal services as mail and telegraph. Governors
also enjoyed residual powers to enact other taxes not already controlled by
the federal government, and they could seek loans, internationally if nec-
essary, with no oversight from the center.
For São Paulo and other major exporters, the arrangement guaranteed
sufficient revenues to reproduce their agro-export economy and fortify
the dominant local political elite. In moments of financial pressure, they
could appeal to the federal level for support, which was always forthcom-
ing, as they both controlled the national executive and could cajole the
compliance of weaker states whose leaders were essentially dependent on
the large states for the revenues to sustain their own clientelist regimes
(Lopreato, 2002: 9–11, 15–20).
Stable revenues in large states also allowed them to pursue credit on inter-
national markets and essentially drive national macroeconomic policy. The
Republic took steps to secure credit-worthiness when major subnational
governments needed access to foreign capital, and the most important public
investments to support agricultural exports occurred on behalf of or at the
subnational level (Martinez Fritscher and Musacchio, 2009). It was the São
Paulo state coffee marketing boards that managed prices on international
66 A. SCHNEIDER
markets by purchasing, and occasionally destroying, excess coffee stocks

(Baer, 2001: 20–21), and state public health and education systems emerged
a decade before the national government (Love, 2013).
The poorer and weaker states were particularly vulnerable under this
arrangement. Their exports were minimal, making their revenues insuffi-
cient to sustain local administrations. Instead, they were forced to rely on
other taxes, especially taxes on exports to other states and taxes on sales
and transport within their borders, and seek tax handles on any number of
obscure bases, such as levies for establishing businesses, consumption of
basic items, and imports—complicated and distortionary taxes insufficient
to sustain most administrations (Lopreato, 2002: 18).
The central government was constitutionally empowered to intervene
in state governments, but it did not. In part, this was due to state govern-
ments amassing their own security forces, equal to the national army in the
most powerful cases. It was only in rare moments, when state elites divided
and the agro-export model faced decline, that the central government
gained a degree of autonomy. This was the case after World War I, when
the decline in international trade temporarily weakened state oligarchies
and convinced them of the need for a federal power with more significant
political and administrative tools. In this window of opportunity, the
national government imposed orthodox adjustment through expenditure
cuts, tax increases, and revaluing the currency. Although it hurt exporters
in the short run, the policies allowed the national government to absorb
subnational loans and repay foreign debts, renewing subnational access to
international markets (Lopreato, 2002: 19). The adjustment also set a
precedent by expanding central government access to tax revenues and
increasing the bases to which it alone had access. This included adding
items to which the consumption tax was applied, creating a tax on sales
(1922), and taxing income (1924).
When international commodity prices collapsed in 1929, revenues
from exports plunged and the fiscal measures adopted during the 1920s
were insufficient to sustain central and regional government administra-
tions. The Old Republic had begun with a coincident reform that aligned
fiscal and federal bargain in support of an agro-export development model.
The Old Republic fell apart with the gradual unbalancing of federal bar-
gains, as politically and economically dominant large states increasingly
pressed policies to advance a more urban and industrial economy, but
found that the fiscal bargain was incapable of advancing a new pattern of
international insertion.
6 Fiscal Federal Parallelism for Industrialization

The new fiscal federal bargain that emerged in the 1930s erected a parallel
architecture of central government state institutions and revenue streams
to stimulate the urban and industrial economy. While the new fiscal federal
bargain successfully charted a new path of international insertion, it was
gradually undermined by shifting federal dynamics that undercut central
authority, which by the 1960s had produced a fiscal crisis.
Industrialization during the 1930s resulted from public policies that
included central government subsidies, trade protections, and tax incen-
tives to build a domestic industrial sector (Furtado, 1972). According to
historical data from the Brazilian Geography and Statistics Institute (IBGE
in Portuguese), the value of Brazilian industry increased from Cr$16 billion
in 1939 to Cr$109 billion in 1949 and Cr$1194 billion in 1959. The
number of workers in industry more than doubled in twenty years, from
8,50,000 in 1939 to more than 1.8 million in 1959, and the value of their
salaries increased from Cr$1.9 billion in 1939 to Cr$13.8 billion in 1949
and Cr$ 145.2 billion in 1959. The number of industrial establishments
increased from 43,000 in 1939 to 1,11,000 in 1959.1 The pinnacle of this
phase of industrialization came in the second half of the 1950s, when
President Juscelino Kubitschek announced a Plan of Goals in which Brazil
would grow “Fifty years in Five” (Evans, 1979: 30–54).
To direct the urban and industrial economy, the government constructed
a parallel architecture of centralized institutions. The central government
created state monopolies in infrastructure and strategic sectors and entities
for long-term planning and research. Their budgets and personnel regula-
tions were autonomous from the rest of the public sector, and they were
allowed to mobilize financing on the international market.
To build this federal architecture, the failing fiscal federal bargain of the
Old Republic had to be undone. In the midst of a split among Old
Republic elites, the Revolution of 1930 placed Rio Grande do Sul politi-
cian Getulio Vargas in control of the central government, and “he reac-
commodated the regional elites in a new power scheme in which there
were other actors involved, particularly, the tenentes,” the military elites
who had backed his rise (Abrucio, 1998: 42). The 1934 constitution he
introduced did not last long, but it laid out the architecture of a fiscal
program to reorient revenues away from fluctuating export taxes and
toward the urban and domestic economy. National revenues targeted con-
sumption and income; states gained taxes on sales and kept control of tax
68 A. SCHNEIDER
on property, transfer of property, services, professions, and exports; and,

municipalities received taxes on buildings, urban property, public parks,
rural income, and municipal services (Varsano, 1996: 3).
Vargas, reelected indirectly as president, used revolts in Rio, Natal, and
Recife as an excuse for a self-coup in 1937, the repression of opposition,
and a new federal bargain codified in the Estado Novo, “New State,” con-
stitution. The Estado Novo eliminated the elected position of governor
and established an appointed interventor as the chief administrator of each
state, chosen specifically from outside of the established political elite to
ensure they acted on behalf of Vargas and not local political parties
(Abrucio, 1998: 45; Campello de Souza, 1976: 14). Interventors were the
brokers of federal patronage, and they established their own patronage
hierarchies to absorb or rival existing elites and dominate state politics
(Abrucio: 1998: 46f).
There were concessions to regionalism, however. While the Estado
Novo centralized resources, it did not significantly alter the tax powers
outlined in the 1934 constitution, leaving significant fiscal power in the
hands of states. In terms of expenses, the fiscal outlays that the central
government absorbed were largely those associated with the agro-export
model, taking over the task of smoothing the price of coffee and sugar and
creating additional agencies with similar functions for salt, tea, cacao, and
timber (Draibe, 1985: 87–100).2 Beyond these areas, however, most
expenses of direct administration (education, health, and transportation)
remained in the hands of state and local authorities, and the sales tax gave
them a stable, if unspectacular, new source of revenue. They spent approx-
imately 3.02% of GDP in 1930, and they spent approximately 6.28% of
GDP in 1960. By the end of the 1930s, taxes rose to almost 14% of GDP,
and the subnational level continued to be responsible for a little more than
a third of this total.3
Yet, Vargas and his allies were up to something more substantial, and
the formal tax architecture summarized only a portion of their actions.
Major reworking of the fiscal federal bargain was the establishment of a
parallel bureaucracy linked directly to Vargas and the office of the
presidency, with its own political base of support, its own fiscal base, and
its own expenditure powers. The corporatist system linked workers and
business directly to the executive branch, registering and regulating which
organizations were legally empowered to enter collective bargaining
agreements, the terms of labor agreements, and a special legal system to
adjudicate disputes. The labor code was inscribed with inducements to
formal sector workers in the form of wage protections, benefit guarantees,

unemployment assistance, and training programs. These were also accom-
panied by a host of constraints on their organizing and bargaining, all of
which were administered through the Ministry of Labor (Collier & Collier,
1979; Schmitter, 1971).
To sustain state-led industrialization, an alternative and parallel system
of finance, not subject to regional pressures, drew revenues from dynamic
urban sectors. The revenue instruments chosen were contributions on sal-
ary and transactions within productive processes, and the funds available
were potentially abundant, as the urban sector was clearly booming. With
corporatism, employees covered by formal contracts, and therefore con-
tributing to social insurance schemes, doubled overnight, from 8,44,000 in
1937 to 1.787 million in 1938, and their number increased steadily to
2.762 million in 1945, the end of the Estado Novo. By 1963, 5.711
million workers paid into the system, and only 1.271 million were retired
and/or drawing benefits (around an 80/20 split). Even as the number of
retirees crept upwards, surpluses were all but guaranteed so long as pay-
outs did not keep pace with inflation (Lopreato, 2002: 21).
The existence of parallel fiscal systems led some to label the Estado
Novo a “patronage-oriented developmental state”. Regional elites were
coopted with material benefits that they distributed to their clients, and
rising urban elites were coordinated through a centrally directed, parallel,
administrative bureaucracy. Divisions among the Vargas allies, pressure to
democratize following World War II, and discontent among elites in the
poorer states spelled the collapse of the Estado Novo fiscal federal bargain
in 1945, but Vargas had seen the writing on the wall. He sought to reart-
iculate his coalition through political parties that could channel his urban
support base, and dissatisfied regional and rural elites gravitated to the
main opposition.
The constitution of 1946 made few changes to the tax structure,
though it set in motion a major change in federal bargains by shifting
power and resources to subnational governments. Discretionary transfers
to subnational governments and annual budget allocations were now fixed
in a series of revenue-sharing formulas, varying according to geographic
size, population, consumption, and production.4 Among the federal taxes
shared were federal income tax, consumption tax, and levies on electricity
and mineral extraction.5 Municipalities gained control over municipal
stamp duties and taxes on professions, and state governments regained
residual powers to tax. In terms of proportions, the federal government
70 A. SCHNEIDER
share of total taxes fell to 60% in 1950, recuperating slightly during the
1950s only to fall again through 1964, when it fell below 60% for the first
time since before the Estado Novo.6
The most devastating handicap of the post-war industrialization effort
was a chronic foreign exchange shortage. Declining prices for primary
exports and a growing demand for imports led the central government to
address the imbalance through a variety of stopgap mechanisms, including
exchange rate manipulation and tariffs, which both adjusted accounts and
stimulated industry (Baer, 2001: 55). Additional stimulation came from
spending programs, especially in the area of infrastructure, leading to the
creation of the National Bank of Economic Development (BNDE).
Capital was forthcoming in years of high growth, but by the end of the
decade the government increasingly turned to seignorage as a source of
finance, printing new money, inflating away obligations, and creating a
spiral of debt costs, price increases, and wage demands.
The post-1945 federal bargain further undermined fiscal bargains, as
regional elites used their power to erode both federal and municipal
resources, increasing their share of revenues from 40% to 45% from 1952
to 1964, while the central government and municipal shares fell (Lopreato,
2002: 39). Unsustainable fiscal crisis was inherited by Janio Quadros,
elected in 1960 on a platform of cleaning-up politics, but essentially
handed a task made impossible by the stalemate among regional elite,
partisan, and popular sectors. After Quadros resigned, the Brazilian
Worker Party (PTB) vice president, João Goulart, took over in 1961, and
attempted a wholescale redefinition of Brazil’s relationship to the interna-
tional economy, favoring small-scale capital and basic agricultural produc-
tion for domestic consumption while confronting international capital
with laws restricting profit repatriation, limiting capital outflows, and
nationalizations (Baer, 2001: 73). His gamble was unsuccessful. Prices
rose, political polarization increased, and the fiscal and monetary sustain-
ability of the government decayed (Cohen, 1994: chapter 6; Stepan, 1978:
110–138).
The Estado Novo fiscal federal bargain established a parallel system of
centralized finance to promote import-substitution industrialization. This
parallel system existed alongside, and was gradually undermined by
accommodations to regional elites, who used their leverage to undercut
national fiscal accounts and eventually produced crisis that discredited
regional actors, political elites, and the “easy” phase of import-substitu-
tion industrialization.
7 Fiscal Federal Centralization

for Industrial Deepening
The military seized power in 1964 and initiated a new fiscal federal bar-
gain characterized by centralized, authoritarian coordination of industrial
deepening. To increase rates of investment, the regime concentrated
income and increased extraction, undertaking the most significant tax
reform since the Old Republic while centralizing funds in the central gov-
ernment and state enterprises. Growth boomed but increased political
conflict during the 1970s forced the military to cede power and resources
to regionally based elites, undermining the fiscal federal bargain just as
inflation and slowing growth worsened, leading up to democratization in
1985 (Stepan, 1975: 97).
The military rejuvenated the system of parallel federal administration
inherited from the Estado Novo. Centralized technical bureaucracy main-
tained support to national industrialists but now gave a leading role to
multinational capital, brought in to scale-up the size and sophistication of
national industry. The effect was to internationalize Brazilian industrial-
ization with an infusion of external capital, technology, and ownership, as
well as increased capacity to export (Evans, 1979). Growth fell below 5%
only twice in fifteen years, and was frequently above 10%, averaging 11.3%
from 1968 to 1980.
Industry share of GDP increased from 34% to 44%, growing more than
12% per year, upgrading from traditional manufactures like textile and
clothing to more complex capital and intermediate goods, like transport
equipment, machinery, and electrical equipment (Baer, 2001: 75–77,
Appendix A1). Certain sectors were reserved for state enterprises, such as
strategic intermediate inputs of steel, mining, and petrochemicals, as well
as energy, public utilities, and banking (Rezende, 1982).
When the first oil shock occurred in 1973, Brazil doubled-down its
deepening strategy. The regime opted for large-scale projects in capital
goods, steel, and infrastructure through the Second National Development
Plan (PND II) (Barros de Castro & Pires de Souza, 1985), a strategy
made possible by the availability of international finance in markets flush
with petrodollars and offering low interest rates. Borrowing increased,
with net debt rising from US$6.2 billion in 1973 to US$31.6 billion in
1978, 63.3% of which was in the hands of the public sector.
These strategies of industrial deepening interacted in several ways with
fiscal federal bargains. When the military had lost key states in the 1965
72 A. SCHNEIDER
governor election, hardliners acted on their suspicion of the political class

in general and of opposition governors in particular (Abrucio, 1998:
61–62) to replace clientelist and populist regional elites with non-traditional
technical administrators drawn from local states (Sallum Júnior, 1994:
2–3).7 Abrucio and Samuels (1997) label them “governor-technicians,”
and the federal bargain was defined as “unionist-authoritarian,” with limited
civil society space, and indirect elections for state governors and municipal
mayors.8
To support industrial deepening, the military undertook a major fiscal
reform in 1967, addressing a number of the problems that had accumu-
lated since the Vargas reforms of the 1930s and expanding revenues sig-
nificantly (Varsano, 1996). Major innovations on the revenue side
eliminated cascading indirect taxes, improved income tax collection, sim-
plified the tax system, eliminated double taxation of bases by different
levels of government, and reformed tax administration. The reform of
indirect taxes was highlighted by the ICMS (Tax on Circulation of Goods
and Services), one of the first value-added taxes in the world, which
replaced the sales tax (IVC). The impact of the tax reform was significant.
After hovering around 16% of GDP during the 1950s, the military gov-
ernment raised revenues to approximately 25% of GDP, providing signifi-
cant new funds to invest in industrial upgrading.
The reform concentrated resources and authority in the federal gov-
ernment, but that centralized fiscal federal bargain shifted after the mid-
1970s. Regional elites had been alienated by governor-technicians and
the campaigns run centrally from Brasília (Abrucio & Samuels, 1997:
147), and they secured a majority of the vote in the 1974 election, dou-
bling opposition Congressional representation to 165 of 364 seats, and
raising their total to 20 in the Senate, almost a third of the total 66. The
regime responded by reorganizing both fiscal and federal arrangements.
First, as Hagopian has observed, the military renewed their alliance with
traditional clientelist elites in the states, “When the military was chal-
lenged to shore up its sagging support, it revitalized its alliance with the
political elites” (Hagopian, 1996: 14). What emerged was a hybrid politi-
cal form, combining elements of traditional clientelism with modern
bureaucracy, distributing the material resources and privileges of a
bureaucratic state to sustain both urban and rural clientelist networks.
The military also manipulated the party system, gradually opening com-
petition for subnational and legislative offices, but doing so in ways that
would fragment the opposition while encouraging regime unity and even
expanding conservative representation, creating new states in rural
regions and altering the formula for representation.
This coincided with the second national development plan, PND II,
which sought to deconcentrate industries from the São Paulo–Rio corri-
dor. As Abrucio relates, “(President) Geisel sought to make federalism
more multipolar in economic terms, weakening the wealthiest states, espe-
cially São Paulo. In this way, the power of the strongest states—usually in
opposition to the regime—were counterbalanced by the association
between the Union and the emerging states” (Abrucio, 1998: 85–86).
While the military was able to slow its departure from power until 1985,
it could not dictate the terms, and it was forced to increasingly shift
resources to its clientelist allies in the rural and less-developed states.
In the context of inflationary shocks, rising oil prices, and depressed
global trade, these changes to the federal bargain undermined fiscal capac-
ity. “The deceleration in economic growth, the increase in inflation and
the increase in fiscal exemptions limited the receipts of state governments.
Combined with rising debt service costs, help to explain the situation of
state finance and financial problems” (Lopreato, 2002: 68). Regime
attempts to stimulate deepening with tax exemptions, preferences, and
special regimes further eroded the fiscal base, which stagnated. Subnational
governments were particularly afflicted, as centralized fiscal authority and
absorption of concurrent subnational tax bases and rates made it impossi-
ble for states and municipalities to recuperate fiscal solvency.
Steps taken to patch fiscal shortfalls at the national level further preju-
diced subnational accounts. The regime came to depend on earmarked lev-
ies on payroll and other transactions, compulsory federal savings funds,
termed social contributions, including the Contribution toward the Social
Integration Program (PIS), the Program for the Formation of the Public
Sector Fund (PASEP), and the Social Investment Fund (FINSOCIAL)
(Blanco Cossio, 2002). Not quite taxes, and not shared with subnational
units, they protected national revenues even as they worsened revenue qual-
ity with cumulative and distortionary charges. The result was a further cen-
tralization of resources, and by 1980 the central government was collecting
80% of all revenues, and even after transfers, its share of available tax receipts
rose from 40.6% to 51.6%, while the state share fell from 46.3% to 35.2%.
As the military neared its exit in 1985, and in an effort to favor its allies
in poorer and rural states, it reformed the federal transfer system—State
Participation Fund (FPE) and Municipal Participation Fund (FPM)
74 A. SCHNEIDER
(Graham, 1990). The value of FPE and FPM were raised in 1980 to 11%
of the total income tax (IR) and industrial products tax (IPI), 12.5% in
1984, and 14% in 1985, with the FPM raised to 16%. Special portions of
the transfers were reserved for the poorer and more conservative Northern,
Northeastern, and Central-Western states (10% in 1976–1977 and 20% in
1978). While state leaders from wealthier states secured increases in the tax
on goods (ICM) to 16% in 1982 and 17% in 1984, the regime assumed the
cost of credits on ICM extended to enterprises in the North and Northeast.
The main benefits to wealthier states came through state enterprise invest-
ments, which tended to target already developed areas (Rezende, 1982).
Furthermore, they had more collateral to offer required matching funds
(Lopreato, 2002: 54) and had much stronger state banks to secure capital for
investments. Total state external debt rose to US$22.8 billion, with
US$18.3 billion owed by Southeastern states and US$8.1 billion by São
Paulo alone (Resende, 1981, as cited in Abrucio, 1998: 87).
The second oil shock of 1979 and the interest rate shock of the 1980s
revealed the extent of the fiscal crisis afflicting all levels of government.
A rising import bill and cost of financing current and fiscal account imbal-
ances severely constrained public accounts until the mid-1990s. Public
investments had risen from 3% of GDP to 5% of GDP between 1964 and
1970, only to taper toward the end of the decade, dropping to 3.6% of
GDP in 1980 and 1.2% in 1988 (Bresser Pereira, 1996: 58).
The military regime had embarked on a coincident reform of fiscal and
federal bargains in the 1960s, centralizing revenues and pursuing indus-
trial deepening through an alliance of domestic capital, foreign capital,
and state enterprises. When they suffered political setbacks, they opened
the federal system, attempting to absorb regional elites into their coalition
and offered ever greater incentives to restart growth. In the process, how-
ever, they undermined their federal bargain and eventually lost control of
public finance. General economic stagnation signaled the end of
debt-financed industrial deepening and fiscal incapacity at all levels of gov-
ernment, and hyperinflation indicated the bankruptcy of the fiscal federal
bargain elaborated by the military regime.
8 Fiscal Federal Adjustment for Liberalization

and Neo-Developmentalism
The transition to democracy in 1985 opened space for pent-up demands,

inscribed in the 1988 Constitution with mandates for increases in social
spending. Still, ongoing fiscal crisis and hyperinflation meant that no new
fiscal federal bargain appeared until the mid-1990s. When it materialized,

it was underpinned by a steady increase in fiscal resources to finance social
spending and support macroeconomic stability, along with a federal bar-
gain in which regional elites acted as the alliance partners of nationally
dominant social forces. This fiscal federal bargain served to advance first a
liberalizing and then a neo-developmentalist agenda for international
insertion, though the fiscal federal bargain came unraveled with economic
slowdown following the 2009 international financial crisis, punctuated by
the impeachment in 2016 of the sitting president.
Throughout the 1980s and into the 1990s, Brazil faced cycles of infla-
tion and failed stabilization. In total, twelve stabilization plans were
attempted, including five orthodox and six heterodox plans, and each failed
plan only complicated stabilization further by embedding expectations to
create an inertial component to rising prices. A decided turn toward struc-
tural adjustment began under President Collor, elected in 1990, with trade
liberalization and privatization, but his presidency was cut short by corrup-
tion scandals and impeachment. His successor, Fernando Henrique
Cardoso, introduced a monetary shock, called the Real Plan, to break the
cycle of inflationary expectations (Arida & Resende, 1984; Bresser Pereira
& Nakano, 1987), and began a series of efforts at structural adjustment,
including privatization, liberalization, deregulation, as well as a stabiliza-
tion strategy that included raising revenues (Bresser Pereira, 1996).9 The
stabilization strategy eventually came to concentrate on an inflation target-
ing regime known as the “tripé,” in which the Central Bank and the
Ministry of Finance manipulate interest rates and primary fiscal surplus
while keeping exchange rates high, thereby controlling inflation.
These policies came on the heels of industrial slowdown during the debt
crisis and evolved in response to a changed international environment char-
acterized by liberalized trade and capital markets. Instead of activist indus-
trial policy, made impossible by the requirements of fiscal adjustment, the
Cardoso administration (1994–2002) attempted to attract international
capital with regulatory reform, high interest rates, and privatization—a
development strategy dependent on foreign saving (Bresser Pereira, 2010).
While the government decreased its direct investment in economic
activity, it shifted expenditure effort to fulfilling the commitments of the
1988 Constitution, significantly expanding social spending. These
increases began in 1994 and took off after 2002, practically tripling social
spending from 1995 to 2015 from 5% of GDP to close to 15%. Health
expenditure per capita, for example, almost quadrupled from US$315 in
1995 to US$1118 in 2012.10
76 A. SCHNEIDER
37
35
34.7 34.9 34.6
33 33.8 34.1 33.7
32.8
32.4
31 31.9 31.9
31.1
30.4
29
29.3
28.4 28.6 28.6
27 27.9
25
Fig. 3.3 Tax receipts as share of GDP in Brazil, 1994–2010
To support this increase in social spending while sustaining the stabili-

zation effort, the federal government expanded revenues. Increases in
income taxes and the implementation of numerous contributions linked
to social spending outlays more than compensated for decreases in tariffs
as Brazil liberalized international trade. From 1994 to 2010, taxes
increased from 28.4% to 34.6%.
A glimpse at the distribution of taxes and their attribution to different
levels of government highlights two patterns. First, the tax system has
become increasingly complex, ranking Brazil among the countries in
which tax compliance takes the greatest number of hours according to
World Bank Doing Business estimates.11 The single largest tax is a tax on
the circulation of goods and services attributed to the states, accounting
for 7.3% of GDP.
With the states in control of the most important tax on consumption,
the federal government focused much of its tax effort on income taxes and
social contributions. By 2009, direct taxes were almost 60% of the total
revenues, up from barely 44% in 2000. As a percentage of GDP, this rep-
resented an increase from 13.59% to 17.83% (Afonso, 2012).
The federal government also renewed the parallel fiscal structure initi-
ated in the 1930s and renewed under the military in the 1970s, increasing
social contributions from 8.95% of GDP in 1994 to 12.94% of GDP in
Tax, %GDP, by Level (2009)

Municipal Local Services, 0.7
Property, 0.4 Other, 2.1
Income, 6.5
Federal
State
Circulation of goods
and services, 7.3
Social Security, 5.5
Vehicles, 0.6
State SS, 0.5

Public sector SS, 0.5 SS Contribution on
receipts, 4
International trade, 0.6
Financial
transactions, 0.7
Welfare
contribution on Industrial Health contribution Labor contribution
receipts, 0.9 Products, 1.2 on receipts, 1.4 on dismissal, 1.6
Fig. 3.4 Tax mix in Brazil, 2009
2010.12 As before, social contributions hold several attractions for the cen-
tral government. First, while other federal taxes are shared with state and
local governments, contributions are not. Second, while contributions are
putatively reserved for specific outlays, they are frequently available for
other uses, either because the outlays would occur long in the future (as in
social security) or because the outlays were not particularly well monitored
by Congress. While contributions, as well as other indirect taxes, tend to be
regressive, their most important characteristic in the context of democrati-
zation is that they carry the political legitimacy of a promise. The govern-
ment commits to increasing social spending primarily benefitting middle
classes and popular sectors in exchange for increased contributions.
The federal government adapted its fiscal bargain around increased fis-
cal effort to raise revenues for social spending, but it took time to rework
the federal bargain in a complementary way. Subnational governments
enjoyed greater fiscal resources as a result of constitutionally mandated
decentralization, which raised the shares of federal taxes transferred to
78 A. SCHNEIDER
states to 21.5% and 22.5% to municipalities. Beginning in 1995, the fed-

eral government began reworking the fiscal federal bargain to recover
some of its lost revenues (Samuels, 2003: 555–556). Municipalities suf-
fered less, increasing their share of receipts available after transfers overall
from 10.7% in 1988 to 18.3% in 2010. This increase came only partly at
the expense of the federal government, which dropped from 62.5% of
available receipts to 57%, and the rest came from the share of state govern-
ments, whose share fell from 26.8% to 24.7% of available receipts.
Prior to 1994, inflation had hidden subnational imbalances, and state
governments especially used subnational state enterprises and banks to
take on debt, which rose to US$95 billion by 1995 (Dillinger, 1995).
These debts became unpayable as stabilization eliminated inflationary
finance, federal retention of revenues lowered transfers, and high interest
rates increased burdens (Alston et al., 2006). States were forced to accept
bailouts that included ceilings on outlays, debt limits, and privatization
(Webb, 2004). Within a year, almost all state banks were eliminated or
turned into development banks. In 1999, the new federal bargain was
institutionalized in a Fiscal Responsibility Law that placed limits on debt
as a percentage of current receipts, a “golden rule” for credit operations
that cannot exceed capital expenses, a cap on personnel spending at 60%
of current revenue, and limits on credit and new payment obligations in
the final year of gubernatorial mandates (IMF, 2001: 1).
The new fiscal federal arrangement greatly constrained state govern-
ments to fall within the national fiscal federal bargain of increased revenues
for social spending and macroeconomic stability. Still, there was room in
the bargain for regional elites, especially those drawn from poorer states.
In the context of a fragmented party system, they were essential coalition
partners to federal governments. Since 1989, the party of the president
has had consistently low representation, never above the 99 out of 513
seats won in 1998 and as low as 41 seats under Collor’s government. To
deal with these issues, subsequent governments managed governance
through “presidential coalitionism” (Abranches, 1988), building legisla-
tive supermajorities that could withstand occasional defections. To secure
ally support, presidents deploy a bevy of resources, such as ministerial
appointments, tens of thousands of federal jobs, and release of investments
in the bailiwicks of individual legislators (Pereira, Power, & Rennó, 2005).
As the largest catch-all party with dominance in a number of important
poorer and rural states, the Party of the Brazilian Democracy Movement
(PMDB) has proven itself to be the essential coalition partner to all
governing parties, along with a scattering of additional clientelist and

patronage-oriented additional parties (Nobre, 2010).
The limits of the fiscal federal bargain for adjustment were compatible
with quite different development strategies, favoring different factions of
local elite and popular sectors. During Cardoso’s presidency, international
insertion depended on attracting foreign savings with high interest rates,
deregulation, and privatization, and the main local counterparts able to
intermediate the entrance of international capital were local financial and
service elites. These elites were especially supportive of Cardoso’s Party of
Brazilian Social Democracy (PSDB) and its most important bases in São
Paulo, as well as a few other wealthy states. To the degree that elites from
poorer states could participate, they had to emulate the cosmopolitan
deregulation and good governance favored by international capital
(Tendler, 1997) or parlay their leverage as essential coalition partners to
attract federal subsidies.
By contrast, when the Workers’ Party won power in 2002, they gradu-
ally shifted to a more neo-developmentalist strategy of international inser-
tion (Ban, 2012). The first Workers’ Party (PT) president, Luiz Ignacio
“Lula” da Silva, took advantage of rising commodity prices to lower debt
burdens, become less dependent on international capital, and use state
spending and subsidized credit to boost the fortunes of large national
companies, especially those commodity-processing firms able to compete
internationally. This neo-developmentalist strategy remained within the
limits of macroeconomic stability, and it enabled expanded social spend-
ing, wage increases, and public employment to benefit lower- and middle-
class sector PT support bases.
The fiscal federal bargain that took shape during the 1990s accommo-
dated both the development with foreign savings strategy favored by São
Paulo financial and services elites and neo-developmentalist strategy
favored by popular sectors, middle classes, and internationalized agribusi-
ness interests. The common fiscal federal thread traced through both of
these social coalitions was a bargain that exchanged increased revenues for
social spending and macroeconomic stability and patronage for regionally
dispersed alliance partners operating through coalitional presidentialism.
The fiscal federal bargain came undone during the second Workers’ Party
government, when commodity prices fell, growth slowed, and the presi-
dent was unable to sustain either the fiscal or the federal side of the bar-
gain. Attempts to restart growth with austerity policies only abrogated the
revenues for spending and stability bargain, and undercut the availability
of patronage for regional allies.
80 A. SCHNEIDER
In the context of the unraveling fiscal federal bargain, the Workers’

Party president, Dilma Rousseff, was impeached in 2016. The incoming
government has essentially thrown out the fiscal bargain, introducing a
constitutional amendment to lock in spending freezes for twenty years,
likely falling heavily on social spending. The new government’s apparent
commitment to the inflation-targeting macroeconomic stability strategy
suggests it will not forego much in terms of taxes, and it has continued
with a coalitional presidentialism strategy that includes favors to regionally
dominant elite, evidenced by a series of bailouts to state governors.
9 Conclusions
State capacity in Brazil has progressed in qualitative leaps in response to
new insertions in the international economy. These leaps have been marked
by changes to federalism and tax, which are tasked with accommodating
rising and falling elite and popular sectors in what can be called fiscal federal
bargains. Moments of coincident reform of both tax and federalism mark
the construction of a new fiscal federal bargain that increases state capacity.
Such moments have been rare, and more frequent have been moments of
divergent reform in which institutions of tax and federalism shift indepen-
dently, producing a disjuncture in fiscal federal bargains.
The approach taken in this chapter fits squarely within the relational,
historical, and transnational approach to tax taken in this volume (see Atria
et al., this volume). As an indicator of social relationships, tax offers a useful
measure of the ability of state actors to enter fiscal arrangements with soci-
ety to secure revenues needed to promote development. In fact, relation-
ships around tax intersect closely with federal relationships, as agreements
around revenues and benefits also carry implications for which levels of
governments and jurisdictions will concentrate control of resources. In
large federal countries like Brazil, state–society relations and interjurisdic-
tional agreements come together in fiscal federal arrangements.
Furthermore, contemporary outlines of revenues and federalism bear
the imprint of historical fiscal federal arrangements. Contemporary high
levels of revenue mobilization and centralization in certain areas of public
policy appear as the legacy of coincident reforms to tax and federalism.
Ongoing complexity and regressivity and fiscal imbalances in multiple
jurisdictions appear as the legacy of divergent reforms. The coexistence of
these seemingly opposing pieces of evidence is only intelligible through a
historical approach that treat current institutional arrangements as the
accretion of prior decisions.
Finally, the transnational character of fiscal federal sociology appears in

the challenges and responses as the Brazilian state faces new patterns of
international insertion. With each shift in the way Brazilian economic
actors fit into the international economy, state actors required new capaci-
ties, for which reforms to public finance and federalism were required.
Coincident reforms that achieve significant new state capacities succeed in
catapulting Brazil to new levels of development and international engage-
ment. Yet, fiscal federal arrangements do not appear adaptable to the
ongoing challenges posed by international pressures or shifting domestic
balances of power. As a result, moments of coincident reform are inter-
rupted by much longer periods of divergent reform, when fiscal and fed-
eral arrangements work at cross-purposes.
Notes
1. http://www.ibge.gov.br/seculoxx/estatisticas_economicas.shtm.
Checked 3/19/07.
2. As Furtado notes, “Unconsciously, Brazil undertook an anticyclical policy
of larger relative proportions than had been practiced in industrial coun-
tries until that time” (Furtado, 1972: 192).
3. The only sources of revenue which were moved from the subnational to
the national level were the Unified Tax on Combustibles and Lubricants
(IUCL, by the abbreviation in Portuguese) and the tax on rural properties.
In relative terms, the states lost ground, but absolute revenues increased
with GDP growth (Blanco Cossio, 2002).
4. Municipalities received 10% of income tax, distributed equally, and they
were required to spend half on rural development (Lopreato, 2002: 32).
5. Furthermore, the states were required to share 30% of revenues with
municipalities, provoking an increase from 2000 municipalities in 1946 to
4000 in 1960 (Blanco Cossio, 2002: 31).
6. “On one hand, the tax format assured freedom to member units to manipu-
late tax and fiscal policy to defend their interests, and on the other, to create
federal mechanisms to support peripheral oligarchies, such that they could
reproduce their form of domination at the local level” (Lopreato, 2002: 34).
7. Collier refers to “a type of authoritarianism characterized by a self-avowedly
technocratic, bureaucratic, non-personalistic approach to policy making
and problem solving” in which authors vary in the number of additional
regime, coalition, and policy characteristics (1979: 364–371, 399–400).
8. Institutional Act Number Five of 1968 cut federal transfers in half, and
made them conditional on approval of local investment plans consistent
with central government priorities. Furthermore, 1967 tax reform greatly
82 A. SCHNEIDER
diminished local revenues, and gave the central government power to

grant exemptions. To access federal discretionary grants, states and munici-
palities had to provide their own matching funds, as well as cover current
expenses associated with investments (Abrucio, 1998: 62–68).
9. During the 1990s, total proceeds from privatization including transferred
debts was $36.6 billion, led by $8.2 billion in steel, $6.9 billion in mining,
$5.6 billion in electricity, and $4.0 billion in oil and gas (BNDES, 2000).
10. http://data.worldbank.org/data-catalog/world-development-indicators.
11. http://www.doingbusiness.org/data/exploreeconomies/brazil/
paying-taxes/.
12. Contributions now include social security, a social security contribution on
business receipts (COFINS), a contribution to unemployment benefits for
dismissed workers (FGTS), a health contribution on receipts (CSS), a wel-
fare contribution on receipts (PIS), a public sector social security contribu-
tion (CPSS), a contribution on profits toward social security (CSL), a
contribution on fuel toward education and health (CIDE), and for a time
there was a contribution toward education and health on financial transac-
tions (CPMF).
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PART II
Transnational Dimension of Taxation

CHAPTER 4
Global Uncertainty in the Evolution of Latin

American Income Taxes
Andrés Biehl and José Tomás Labarca
1 Introduction
On 24 October 1923, the Argentinian economist Raúl Prebisch, of the later
Economic Commission for Latin America and the Caribbean (ECLAC) fame,
sailed to Wellington, New Zealand, via New York. Dispatched by the minister
of Economy and Public Finances, his mission aimed to understand how the
rural economies of Australia and New Zealand had been able to implement a
viable income tax. Despite sharing a similar economic structure, powered by
agricultural and livestock exports, the Argentinian state had been unable to
build up institutional capacity through direct taxation. Working closely with
the Department of Taxation in Melbourne, Prebisch came to appreciate how
the Great War had widened the tax base and strengthened collection; how
technology had been used to calculate farm incomes (averaging incomes to
avoid fluctuations) to boost landowners’ cooperation; and how the tax regime
commanded the consent of citizens as it carried effective penalties on tax
We thank the editors of this volume and Germán Vera for their insightful
comments and suggestions that helped us improve this text both in form and
content. The usual disclaimer applies.
A. Biehl (*) • J.T. Labarca

Instituto de Sociología, Pontificia Universidad Católica de Chile,
Santiago, Chile

DOI 10.1007/978-3-319-60119-9_4
90 A. BIEHL AND J.T. LABARCA
dodgers. While the Argentinian state weakened during the war as interna-
tional markets closed, exports stopped, and trade taxes plummeted, global
uncertainty had failed to break the Australian state. On the contrary, it
enhanced its resilience. While still in Australia, a telegram informed Prebisch
of a sudden shift in political fortunes back home that made him effectively
redundant.1
The travails of Prebisch help us summarize some stylized facts we know
about taxation. The story displays the common themes of war and state
making. Both Australia and New Zealand centralized direct taxes on
income and enlarged their domestic tax base during the conflict and would
do so again during the Second World War (Gilbert, 1943). Shared sacrifice
cemented cooperation and new administrative capacities reduced the costs
of collection along the pattern of other Western nations (Aidt & Jensen,
2009; Scheve & Stasavage, 2016; Tilly, 2006). The contrast with Latin
America could not be sharper. Throughout the nineteenth century, these
new republics resorted to easier and less costly taxes on foreign trade along
with international debt; while internal political strife dented elite coopera-
tion (Centeno, 2002; Gallo, 1991, pp. 145–146). However, as the twen-
tieth century dawned, Prebisch’s story also serves as a testament of Latin
American enthusiasm for foreign models of economic policy. As trade
taxes dried out, state actors veered toward direct taxation. The origin of
these early income taxes would prove fundamental to the evolution of
taxation in the region. All governments faced persistent adversity to gen-
eralize the income tax, to turn an originally class into a visible mass tax,
and, as Prebisch’s frustration would make plain, to stiffen bureaucratic
capacities with some autonomy from political patronage.
A restricted tax base constrained the productivity of the income tax and
reflected the collective action problems that economic and political actors
confronted as the state strove to improve consent and achieve compliance.
At a time of strong calls to develop national industries, this situation para-
doxically meant that the state continued to rely on other sources of reve-
nue such as debt and trade taxes. The difficulty in creating a mass, stable,
domestic tax was partly solved in the 1980s by the introduction of mass
value-added taxes (VAT). It successfully increased revenue, but at the
double cost of concealing the mutual obligations of state and citizen, and
making this invisible fiscal pact regressive.
In this chapter, we explore how uncertainty rendered taxation of trade
erratic and shaped the internal struggles to enact and reform a personal
income tax. We will understand uncertainty as a rare event or set of events
GLOBAL UNCERTAINTY IN THE EVOLUTION OF LATIN AMERICAN... 91
that are both unpredictable for some key actor and triggers intense conse-
quences.2 Uncertainty undermines what is taken to be a normal and habit-
ual state of things by introducing new disorder or ruining expectations
over existing order. Contrary to expectations that trade would pick up and
spearhead a return to economic prosperity after the First World War, the
new scenario forced the state to impose domestic taxes on its elites to sur-
vive. This class-based personal income tax was possible with the underly-
ing agreement that world demand for natural resources would recover,
thus making domestic taxation unnecessary.
The chapter is divided in four parts. First, we review the role that a
personal income tax plays in mediating uncertainty. Second, we turn to the
Latin American puzzle. Across the region, states discussed and adopted
income taxes as the global crisis drained traditional sources of revenue.
However, uncooperative behavior by existing elites, made worse by a lim-
ited capacity to broaden the tax base, hampered their growth. Despite
sharing this similarity, namely a limited domestic tax base, we review dif-
ferences of political and institutional processes between countries. Third,
as the income tax stagnated, we argue that the state remained exposed to
global uncertainty through international markets and trade taxes, both on
imports and exports. Instead of a stable and adapting fiscal pact, the labor
market absorbed and distributed uncertainty: a class tax reproduced the
fleeting and narrow social settlements between few organized economic
and political actors. This fragmentation precluded sustained collective
action and reduced the scope of taxation and social policy in the long
term. Fourth, we conclude by way of discussing our findings and their
relevance for today’s tax systems examining their transnational and histori-
cal dimensions. By studying Latin American income taxation, we propose
a novel perspective that questions the assumed linearity between income
taxes, mass taxation, and institutional building. This perspective highlights
the impact of transnational events in the fiscal pacts of the region.
2 Income Taxes and State Fragility

Explanations on the origins and success of income taxes have long divided
academia. A common theme is the fiscal imperative of bellicist approaches,
according to which war or the threat of war force the state to extract
resources from society. Used generally to explain Western Europe and its
colonial offshoots, the argument contends that despite diversity in initial
conditions, interstate competition leads through different combinations
of capital and coercion to a convergence in one model of the tax state sup-
ported, mainly, by domestic income taxes (Tilly, 2006). As war mobilizes
the nation, a growing fiscal base and extended feeling of shared sacrifice
spur progressivity, accountability, and redistribution (Scheve & Stasavage,
2016). This model works as long as citizens themselves are threatened by
war and conscripted into the army, with elites and state makers granting
democracy in return for revenue. The relationship between war and state
making does not necessarily hold, as we have learnt from recent interven-
tions; today’s wars can be fought with a ‘credit card’ without involving
institution building (Bueno de Mesquita & Smith, 2016, Chapter 5).
This approach also falls short of explaining Latin American taxation
(see Saylor, 2014, and in this volume). Since independence, the wars
fought by Latin American states were not conductive to permanent
domestic taxation and administrative efficiency, nor did they mobilize
entire nations (Centeno, 2002, pp. 261–280).3 Even if the pattern of rural
mobilization could define the contours of political plurality and democ-
racy in the future, for instance by originating political parties in Chile,
Colombia, and Uruguay (López-Alves, 2000, pp. 15–48), wars did not
enhance state administration. Social groups, particularly elites, were diffi-
cult to discipline, and trade taxes and debt, together with inflation and
currency debasement, were cheaper and more sensible options to fund the
state (see Saylor in this volume).
The biggest question for both European and Latin American state mak-
ing concerns how internal dynamics played out. Economic historians have
argued that self-interested elites created institutions that reproduced his-
torical inequalities and hampered the economic performance of Latin
America, including the possibility of democracy and income taxes (see
Coatsworth (2008) for a critical review). Sokoloff and Zolt (2006, 2007),
find that the extensive property and income taxes of colonial North
America reflected a level of political equality that allowed their communi-
ties to invest in education and redistribute to the less wealthy.4 This pat-
tern, they argue, is in stark contrast to the prevalent inequality and absence
of self-government in Latin American colonies that gifted their elites with
the privilege of little taxation. Absence of political representation and
property rights, has led to the general impression that Latin American
conservative elites opposed progressive income taxation. Extending such
reasoning to Europe, it was natural to think that as democracy expanded,
newly represented groups from liberal and working-class backgrounds
would introduce income taxes to wrest away the power of entrenched
landed elites and finance new social expenditures (Lindert, 2007).
Recent research has turned this common assumption upside down

(Mares & Queralt, 2015; Martin & Prasad, 2014), and perhaps more
importantly, might suggest that Latin America is not too exceptional.
European conservatives in non-democratic regimes faced by mounting
pressure for redistribution, enacted income taxes to shift the burden of
taxation from rural to growing urban and industrial areas. By taxing per-
sonal or family incomes, industrialists and wage earners footed a larger
part of the increasing state bill. Think of nineteenth-century England and
early-twentieth-century Scandinavia or Oceania (Baldwin, 1999; Lindert,
2007; Mendelsohn, 1954). Social expenditures flow to both urban and
rural areas, lowering in the process the labor costs of landowners by pro-
viding state-financed insurance. While the income tax originally targets
industrialists and higher incomes at progressive rates, wage earners con-
sent, in time, to being taxed in return for social security.
Broadly defined conservative elites, many of them large landowners,
behaved pretty much in the same way in Latin America, not with the
intention to shift the cost of social expenditures to urban areas but as a
last-minute measure to save the state during fiscal crises. That is, they dis-
counted the future with the expectation of a return of export booms,
enhanced international credit, and taxation of foreign companies. What
these elites lacked was a social objective, pursued by the state, as they
relied in traditional paternalistic forms of insurance in the labor market or
within their large estates. Employers found coordination difficult and
resisted outsourcing firm-level insurance, the foundation of their workers’
loyalty, to competing economic and political actors (see Vergara, 2013).
This review highlights disciplinary divisions. While economic historians
consider democracy as a determinant of income taxation, sociologists and
political scientists have turned the causality of the democracy-taxation link
on its head. Perhaps, it is not rights or democracy, sustained in some sort
of social egalitarianism, that allow for the creation of stable, progressive
income taxes, but shared fiscal obligations that lead to rights and democ-
racy (Besley & Persson, 2011; Ross, 2004; Scheve & Stasavage, 2016;
Tilly, 2009). Income taxes might result in political inclusion and the rule
of law conditional on the visibility of the relationship between citizens’
civic obligations and state protection. Direct taxes on income are visible as
they presuppose consent and trust. They require people to fill tax returns
and let their incomes be assessed. In contrast, trade taxes or invisible taxes
on consumption (such as the VAT) create a fiscal illusion; they work as
long as obligations remain hidden producing the impression that nobody
is being taxed.
Regardless of the particular social tensions behind its origin, income

taxes symbolically make visible the fiscal pact that formalizes reciprocity
between state and citizen.5 For instance, Besley and Persson (2011) illus-
trate how modern fiscal capacity is conditional on personal income taxa-
tion, and how fiscal capacity is correlated with economic potential and
externalities that go way beyond raising revenue. To receive stable funding
from society, state makers need to set up rules to bargain taxes so as to
legitimize taxation and breed cooperation (Bräutigam, 2008; Levi, 1988;
North, 1981; Tilly, 2009). Otherwise, given the distortionary effects of
taxation, it becomes profitable to evade. As state commitments expand,
rising expenditures are met by a growing tax base: from just taxing the
wealthy, the state is forced to tax populations at large, turning an erstwhile
class into a mass income tax.
Crucial to our argument, a varied and diversified source of revenue pro-
tects the state to uncertainty, making it less fragile. We understand fragility
as the exposure to the consequences of rare events. This is precisely what
the personal income tax failed to do or compensate in a context of uncer-
tainty over taxation of trade. Concentration of state revenue on a small
domestic tax base aggravated Latin American vulnerability to trade taxes
and inhibited long-term social expenditure. Although less costly to bargain
and enforce, trade taxes were open to sudden changes in world markets.
By relying on just one section of the society, the state can either (1) lose
leverage as that particular group can threaten with no cooperation, hence
no revenue, or (2) ignore the grievances of the rest of the population,
becoming less accountable. In contrast, a wider base boosts compliance
and lowers the burdens of collection as less is spent on monitoring and
coercing taxpayers (Bergman, 2009; Lederman, 2003; Leroy, 2008; Levi,
1988). Even if tax rates are low, the fact that most people pay can yield
substantive revenue at little administrative cost. By including all citizens in
a visible fiscal pact, the state builds institutional capacity that will prove
fundamental when challenged by further uncertainty.
The growth of the state and the expansion of its commitments are not
linear but conditional on labor market dynamics. This makes the whole
question of taxation a lot more complex than merely adjusting rates or
taxing a segment of society assuming no further social consequences. How
states and markets articulate to provide insurance, for example, to elicit
legitimacy, affects both the levels of taxation and the distribution of risks
and security among the population (Hall & Soskice, 2001). For instance,
economic coordination in postwar Europe, entailed unions’ acceptance of
wage moderation and high taxation in return for full employment and
increased public services (Mares, 2006).6 Risks and obligations were
shared. Central to tax compliance is the perceived fairness of market and
state provisions, which contribute to lower distributional conflict.
State and market complementarity requires sustained collective action,
supported by a tacit agreement and upholding of rules defining taxation
and insurance, between and within employers’ associations, unions, and
political actors. Collective action allows bargaining either at the state or
firm level to operate over time (Buchanan & Nicholls, 2003; Iversen,
2006; Swenson, 2002). While taxes and spending might provide a basic
net of reciprocity between state institutions and citizens, other forms of
support and insurance exist in farms, parishes, and firms. The limited
scope of charity and parish-based provision, in an emerging industrial set-
ting, is one of the reasons behind the growth of social spending in
Northern Europe (Lindert, 2007). In addition, non-monetary benefits
such as housing, and monetary contributions by employers reduced the
pressure on state insurance and taxation. Firms provide these benefits in
order to increase their workers’ loyalty and retain their best workers
(Akerlof, 1984; Swenson, 2002). This was often the case in countries with
industrial complexes supported by large domestic markets such as the
United States, where economies of scale allowed for reciprocal exchanges
between strong unions and firms for much of the twentieth century
(Swenson, 2002). Alternatively, in small open economies a larger tax base
and public insurance can allow firms to reduce social contributions and
non-monetary benefits; to outsource reciprocity to the state. Economies
in the periphery of world markets that relied on natural resources, such as
Scandinavia and Oceania, took advantage of a large domestic tax base that
supported public investment in infrastructure and education, reducing
their firms’ labor costs on training and insurance (Buchanan & Nicholls,
2003; Iversen & Stephens, 2008; Swenson, 1991, 2002).
In contrast, the Latin American states followed a distinct path to income
taxation, given uncertainty over trade taxes. Global markets for natural
resources were the site that originated most of the uncertainty that states
faced as policy makers counted on constant high demand for their coun-
tries’ commodities. Long accustomed to export-led growth, the First
World War disrupted trade routes while demand and prices for Latin
American resources dropped (Albert, 1988; Bulmer-Thomas, 2003). The
war had stricken markets unexpectedly (Ferguson, 2006), but what turned
uncertainty into a feature of Latin American economies was its continua-
tion into the 1920s and 1930s fueling increasing social discontent.
Economic expectations remained volatile after the war (Albert, 1988,

Chapter 2). As Latin American economies relied on a small export base and
few international partners, exposure to uncertainty was twofold: a drastic
change in one of two parameters could devastate a country. Just before the
war, the two leading commodities represented more than 70% of total
exports in 14 out of 21 Latin American countries, while Britain, the United
States, France, and Germany took most of their export share. By the late
1920s, this situation was very similar: just one commodity represented
more than 50% of the total exports in Bolivia, Brazil, Colombia, Cuba, the
Dominican Republic, El Salvador, Honduras, Guatemala, Nicaragua, and
Venezuela. Besides, trade remained heavily concentrated in a few markets
(Bulmer-Thomas, 2003, pp. 58, 74, 189–190).7 Reliance on trade taxes
and foreign debt suddenly exposed the fragilities of fiscal systems as reve-
nue collapsed across the region (Cortés Conde, 2006, pp. 218–223).
Experts’ optimism that trade and prosperity would return proved
unfounded, as the 1920s closed amid global turmoil and further disruption
to Latin America’s star exports (Díaz Alejandro, 1984); their narrow view
of international conditions compounded uncertainty. Accordingly, state
actors tapped into domestic incomes for much-needed revenue.8
Instead of triggering an institutional innovation that shielded the state
to the effects of global events, the 1920s worsened the potential implica-
tions of global uncertainty. They provided the illusion of stability. Unlike
the Australasian examples of Prebisch, uncertainty did not translate into a
more robust state: the sources of revenue were not diversified while new
social pacts between unions and employers tacitly assumed the continua-
tion of taxes on the external sector, which limited the generalization of
both taxation and insurance.
In the next two sections, we consider the effects of transnational events
as the main driver behind personal income taxes. Our explanation consid-
ers the global position of Latin American economies and the collective
action problems, in terms of long-term compliance, faced in the labor
market that prevented a transition from a class to a mass tax. Global
uncertainty became internal uncertainty as distributional conflict mounted
in the region. The resulting fiscal pact discounted the future under the
illusion that export taxes could sustain the state at a minimum cost of
income tax. We define modern income taxes as those that continue in
existence to this day from their inception in the 1920s and 1930s, and
will only briefly comment on the more sporadic income taxes that were
unsuccessfully tried in the region around that time or followed a similar

pattern afterward. This will necessarily reduce the scope of this chapter
while trying to remain representative of the region.
3 Latin American Income Taxes

So, what drove Latin American income taxes? Consider that the nine-
teenth century witnessed many attempts to introduce income taxes as
states fought their way into existence. However, these early attempts
proved short-lived. A French blockade in 1839 prompted the Argentine
Federation to survey individual incomes in order to decree an income tax
to fund the army (Gelman & Santilli, 2006, Chapter 1). It was never
implemented. Alternatively, uncertainty over global markets triggered new
taxes, for instance in Chile. A drop in wheat prices, the then Chile’s main
produce, led conservative congressmen to design an income and property
tax in 1879 that was ultimately established by a liberal administration
(Sater, 1976). Instead of becoming a permanent feature of the fiscal pact,
the tax was abrogated as the war of the Pacific (1879–1883) left Chile
with rich nitrate deposits to tax, in turn exhausting the fiscal capacity of
the losing sides, Bolivia and Peru (Sicotte, Vizcarra, & Wandschneider,
2008). As long as the Latin American pattern of taxation continued to rely
on export booms prolonged by international loans, there was no need for
permanent domestic taxation (Thorp, 1998, pp. 5–7, 24–25).
The modern personal income tax is a twentieth century phenomenon.
In Latin America, as Table 4.1 illustrates, countries as diverse as Brazil,
Chile, Costa Rica, Mexico, and Peru enacted income taxes in the 1920s,
and many others followed in the 1930s or later in the 1940s. Despite hav-
ing originated in far from ideal democratic settings, these taxes were con-
tested and reflected many competing interests in each country. Generally,
across the region, policy makers agreed on two reasons to introduce them.
First was the technocratic motive. The income tax emulated foreign reci-
pes; it was a ‘scientific’ tool that would place states’ administrations in line
with more advanced nations (Marshall, 1939; Sánchez Román, 2012;
Unda Gutiérrez, 2017). Pivotal to this new appetite for institutional inno-
vation was the mission led by the US economist, Edwin Walter Kemmerer
throughout the 1920s and early 1930s, to advise South American govern-
ments (Drake, 1989). Second, the adoption of personal income taxes
revealed a conscious turn toward domestic industries so as to protect the
economy and an emerging working class. Beyond these reasons, the expe-
rience of income taxation was truly widespread, thanks to the fact that all
states faced economic uncertainty together with an end of commodity

booms. Adding a stimulus for industrial protection, the whole fiscal pact
became a quest for a return to economic predictability.
The new taxes filled external observers with optimism that Latin
America had finally overcome its ‘traditional hostility’ toward direct taxa-
tion by adopting income taxes as a permanent feature of the fiscal system
Table 4.1 Features of 1920s and 1930s modern income taxes in selected Latin
American countries
Country Income tax act Guiding principles Previous domestic taxes
Colombia 1918/1927 Fiscal emergency, state Property, consumption,

modernization stamp duties, taxes on
internal trade (freights)
Chile 1924 Fiscal emergency, attempt to Income, property,
stop fiscal dependency on consumption, stamp
global economy, industrial duties
protection
Mexico 1925 State modernization, fairness Consumption, taxes on
through elimination of internal trade (freights)
indirect taxes
Ecuador 1925 Fiscal emergency, attempt to Stamp duties,
centralize revenue and consumption
modernize the state
Brazil 1926 Centralize revenue, wrest Property, consumption,
away regional fiscal capacities, taxes on internal trade
modernize the state (freights)
Costa Rica 1931/1946 Fiscal emergency and need of Stamp duties,
stable revenue. consumption
Paraguay 1931 Chaco War Consumption
Argentina 1932 Fiscal emergency, attempt to Property, consumption
centralize fiscal revenue and
lessen dependence on import
duties
Peru 1934 State modernization Consumption
Venezuela 1942 Fiscal emergency Consumption
Honduras 1949 Fiscal emergency and need of Stamp duties,
stable revenue consumption
Nicaragua 1952 Fiscal emergency and need of Stamp duties,
stable revenue consumption
Note: Original personal income taxes that anticipated current income taxes
Sources: Adapted from CEPAL (1956); Unda Gutiérrez (2017); Sánchez Román (2012); Paz y Miño
Cepeda (2015); Díaz (1997); Mora Toscano (2013)
(Hanson, 1936, pp. 341, 381). Internally, however, things were more
complex. Many Latin American nations enacted unsuccessful income
taxes. Compare Bolivia in the 1920s with Uruguay much later in the
1960s. Following the Kemmerer mission, Bolivia tried to introduce an
income tax in 1928 without success. In 1951, falling export taxes on tin
finally moved Bolivian policy makers to establish a tax on personal incomes.
As the state lacked the bureaucratic means to enforce it, the tax met with
little compliance while different economic actors lobbied tax officials for
exemptions (Gallo, 1991, pp. 97–143). Often portrayed as an example of
state development in the region, Uruguay sits on the opposite extreme.
Although it boasted some property and domestic taxes on alcohol in the
early twentieth century, Uruguay only enacted a personal income tax in
1962 forced by adverse global conditions and an increasing demand for
public spending. It was repealed in 1975, given its low yield and high col-
lection costs as part of Bordaberry dictatorship’s stabilization program.9
Income taxation only returned to Uruguay in the 1990s (Barreix & Roca,
2007, p. 131). Despite remarkably different state capacities and levels of
economic prosperity, both countries could not sustain a productive income
tax given internal conflicts within their elites and working class groups.
Both countries enacted income taxes following a different mix of technical
advice and external uncertainty over revenue, but the tax stagnated due to
limited state capacity and collective action problems within political and
economic elites.
Longevity is a poor indicator of success. Many of the 1920s income
taxes that survived into the second half of the twentieth century fared
badly in terms of revenue production, compliance, and bureaucratic devel-
opment. Both Colombia and Ecuador illustrate that even if it remains
operational to this day, enacting an income tax does not guarantee its
expected success. Not conservatives, but progressives enacted an income
tax in Ecuador during the ‘Revolución Juliana’ that put an end to oligar-
chic liberal rule in 1925. After decades of political instability, the tax com-
manded little support and was lightly enforced. A dire fiscal crisis in the
1950s compelled the Ecuadorian state to reform the income tax to boost
collection only to be defeated by economic elites coordinated through the
chambers of commerce, agriculture, and industry (Paz y Miño Cepeda,
2015, pp. 139–140).
Colombia went through an analogous process earlier in time. It intro-
duced an income tax in 1918 due to falling commodity prices. Although
proportional (i.e. not progressive), so as to elicit cooperation among
economic elites, it represented no more than 3% of state revenue between

1918 and 1925 (Díaz, 1997). Following Besley and Persson (2011), one
could argue that a tax that raises little revenue is not a complete waste of
effort, as it might represent a long-term investment in fiscal capacity.
However, the Colombian effort fell short of state makers’ objectives.
It was reformed in 1927 on Kemmerer’s advice with the double objec-
tive of making it fairer, through progressive rates, and more efficient, to
reduce the fiscal deficit. Technical considerations supported taxing the
rich and limiting the tax base. Throughout the 1930s and 1940s, the tax
was reformed to lessen the impact of falling trade taxes and the eco-
nomic consequences of the Second World War. The question always
revolved around increasing the contribution of the already taxed, not
expanding the tax base, or achieving compliance (cf. the 1953 reform by
the Rojas military regime). In the end, following limited productivity,
state makers implemented mass indirect consumption taxes in the 1970s
(González & Calderón, 2002, pp. 17–23). Despite its longevity and
technical setup, the personal income tax achieved little in terms of long-
term revenue, as the tax base could not expand in both countries.
Tax data are incomplete for many Latin American states. Figure 4.1
plots all direct taxes as a share of the total revenue to illustrate a variety of
experiences that occurred within the region, and as a conventional mea-
sure of state capacity to penetrate society (Besley & Persson, 2011,
pp. 11–12; Kurtz, 2013, p. 61). Throughout the 1940s and 1950s, direct
60
50
40
30
20
10
0
1910 1920 1930 1940 1950 1960 1970 1980 1990 2000
Argentina Brazil Chile Colombia Mexico Peru
Fig. 4.1 Direct (income and property) taxes as percentage of the total revenue,
selected Latin American countries, 1920–1990
Source: Own elaboration with data taken from Brian Mitchell’s International
Historical Statistics (Palgrave Macmillan Ltd, 2013).
taxation, particularly income taxes, became more productive reflecting

consent by the elites that were being taxed and improved administrative
capacities, even if its absolute yield remained modest. Arguably, consent
followed elite involvement in government together with the expectation
that taxes would be unnecessary in the long run, for instance in Argentina
during the 1930s (Sánchez Román, 2012), which differs from the
Colombian and Ecuadorian experiences where elites opposed taxation.
However, what draws attention is the erratic pattern of the growth and
decline of direct taxes in each country, which at different times and given
a variety of institutional crises resembles an ‘inverted u’ (with the probable
exception of Brazil). Some reasons could be endogenous to tax adminis-
tration. In Chile, for instance, a boost of direct taxes in the 1950s results
from copper mining companies being subject to corporate income taxa-
tion. Venezuelan income tax data are even more extraordinary, given the
taxation of the oil industry (not shown). Nevertheless, if we take any mea-
sure of revenue share as indicative of institutional consolidation, these data
confirm volatility. Naturally, when an economic crisis hits, tax returns
decrease particularly if corporate taxes derive from foreign investment or
if groups subject to pay personal income taxes benefit from evasion.
Inflation bred evasion, as taxpayers artificially went up the income tax
brackets because their incomes were nominally adjusted.10 The evolution
of income taxation was not necessarily organic; on the contrary, it became
symptomatic of the unstable trajectory of Latin American economies.
The income tax was tied to the natural resource structure of Latin
American economies and its fiscal crises. A reason for its introduction,
notably in Argentina in the 1930s, was its value to pay foreign debt so as
to improve international credibility (Cetrángolo & Gómez Sabaini, 2010).
Hence, tax could be used to deepen a pattern of revenue extraction that
relied on debt and foreign investment. Subsequent reforms increased tax
rates keeping the tax base almost untouched.
Overall, these early personal income taxes stagnated amid pressure for
fast economic development and protectionism. This phenomenon has
received many explanations. One is the ‘divide and rule’ argument where
state makers try to divide economic actors (among the elite and working
classes) through a fiscal illusion in order to centralize power. Argentina and
Bolivia would be paradigmatic of this process. These states often preferred
taxes on trade and debt as they could be imposed without incurring in
lengthy negotiations with the society, allowing the state to wrest power
away from local caudillos and provinces (Gallo, 1991, p. 149; Kurtz, 2013,
pp. 61–62). In fact, Latin American income taxes often worked as a sort of

window-dressing for the state, which could present itself as ‘taxing the rich’
while, at the same time, generating the loopholes that would allow these
same rich to remain untaxed or imposing high regressive taxes on consump-
tion (Cademártori, 1971, cap. 7). It was tempting for subsequent govern-
ments in the 1950s and 1960s to abandon tax bargaining altogether in favor
of other sources of revenue, including price controls, expropriations, debt,
consumption, and trade taxes. A related argument is ‘controlled inclusion’.
Following the pattern of early democratic reform from the top (Collier &
Collier, 1991) in which elites mobilize support for their own parties through
an extended franchise, governments would try to include organized groups
into social benefits and exclude them from taxation. These two explanations
focus on a variety of internal processes dealing with the ‘social question’ in
a context of fast economic and political changes.11
But these two domestic explanations would be incomplete without
considering the influence of transnational events and the instrument of
personal income taxation itself. Income taxation came as part and parcel of
what was then considered the experience of more advanced, modern, soci-
eties. After the initial attempts to learn from, mainly, British and French
personal income taxes in the 1920s and 1930s, the scene was set for tech-
nical missions from international organizations in subsequent years. Partly
driven by the inequality and poverty they saw in Latin America, foreign
experts often suggested a path of reform that was not followed in their
own countries (where income taxation became productive as the tax base
expanded). A lot of faith was placed on just one instrument to help these
societies become fairer and more efficient. ECLAC, under Prebisch’s lead-
ership, noted that the income tax stemmed from positive changes: a
monetized economy that allowed the taxation of income, and the need for
stronger states that would implement progressive policies to compensate
for the loss of trade (CEPAL, 1956, p. 142).
However, soon a gap emerged between policy guidelines and research.
Bird and Oldman (1968) describe how by 1961 twenty Latin American
countries had committed to income tax legislation aiming to tax the rich
more heavily, punish evasion, and promote investment. By the late 1960s,
these good intentions had left little in terms of reform or results. Income
taxation continued to be driven by external crises as a short-term measure
with the only real objective to offset loss of revenue.
Latin American income taxes were progressive, but were supported by
a small tax base. For some, persistent inequality left no option but to tax
the wealthy. Vito Tanzi, for instance, contended that income concentra-
tion made mass income taxes unfeasible. Given local conditions, he pro-
posed that about 2% of Ecuadorians, 13% of Chileans, 21% of Venezuelans,
and 25% of Mexicans should be subject to income tax assessment and
payment (Tanzi, 1966, p. 160). If close to 5% of adults paid these income
taxes anyway, he pondered, why would the state waste resources in pre-
venting evasion by the remaining 95%?
With new data, we now know that this argument loses some merit on
comparative grounds. In the early twentieth century, most countries
exhibited significant wealth and income concentration (Milanovic, Lindert
& Williamson, 2010; Williamson, 2015) and taxed, accordingly, a small
section of their elites. What set Latin American income taxes apart was
that the income tax remained class-based. For instance, in 1932 the
Argentinian income tax was payable by around 2% of adults, while the top
marginal rate could reach 12%. By the 1950s, the top marginal rate had
increased to around 40%, but the tax base had increased only to 5%.
Compare it with the tax systems of Prebisch’s original mission. By 1915,
the top marginal rate of the Australian Federal income tax was set at 25%
with a tax base of 14% of the adult population; by the 1950s, the top mar-
ginal rate had surged up to 75% and the tax base to almost 60%. The
numbers for New Zealand were similar. Or consider income taxes in
Norway (1911) and Sweden (1902), both poorer and perhaps as unequal
as Argentina at the beginning of the twentieth century. With an initial top
income rate around 10% and 6%, respectively, and with a tax base of only
7%, by the 1950s, the top income rate grew to more than 70%, while the
tax base covered more than 60% of the adult population.12 In time, how-
ever, across Latin America tax rates became ever more progressive while
the tax became less productive (Arellano & Marfán, 1989; Herschel,
1977; Mann & Smith, 1988, p. 123).
An empirical regularity emerges: income taxes are originally instituted
to provide revenue as global crises drain trade taxes, but they become
nominally geared up to modernize the state and achieve social equality.
Although literature underscores the transformative power of the income
tax, as it can promote monetization and sustain redistribution, the Latin
American income tax expressed an entrenched class structure. By remain-
ing class-based, it excluded wage earners from negotiating politically the
fiscal pact. In a way, policy makers were aiming to square the circle: to
achieve more progressivity and productivity with a constrained tax base.
While inequality in Latin America remained crucial, a small tax base made
the tax less easy to monitor and administer. A limited base means little
revenue even if taxed at high rates, and creates incentives to avoid paying
taxes altogether. This played into the state’s interest to avoid protracted
discussions in Parliaments so as to shift the burden of uncertainty to other
sectors of the economy and the labor market. The resulting fiscal pact
rested on a low base to gain workers’ loyalty and hinged on firms’ contri-
butions and non-monetary benefits to channel insurance.
Income taxes then became embedded in a wider fiscal pact that historically
relied on trade and indirect taxes on consumption (Bulmer-Thomas, 2003,
p. 406). Exemption, privilege, and evasion typified its functioning. Increasing
income tax progressivity was largely a rhetoric device because the state still
depended on indirect trade and consumption taxes that made the whole fis-
cal pact regressive. As a whole, the taxation systems of Latin America dis-
counted the future and were reformed as internal and external uncertainty
hit countries. Control of the political system by excluding wage earners from
the discussion of taxation led to unstable revenue and social spending.
4 State Fragility and the Labor Market

Income taxes demand compliance and cooperation to be productive over
time. A critical mechanism to boost compliance is the transition from a
reduced class base to a generalized mass base (Daunton, 2002). Visible
taxes acquire legitimacy as all (e.g. the people, the nation) are consciously
subject to pay. Equality means that elites feel justly treated and consent to
both income taxes and progressive rates. Non-elites comply as taxes fund
social insurance and redistribute income. Accordingly, mass taxation usu-
ally relates to radical experiences of shared sacrifice and nation building
(e.g. mass wars), or the consolidation of an ethnic identity that entails a
political settlement (see Lieberman, 2003; Schall, 2012).
The alleged positive consequences of a personal income tax require a
wide tax base and cooperation. To that end, mass taxation needs to tran-
scend the limited bounds of class taxation and elicit the acceptance of wage
earners. Latin American labor markets embodied such a social objective as
sites for redistribution and economic stability, but without encouraging
solidarity. In the context of industrial protection, the state offered tariffs in
return for firm-based insurance. Ultimately, states had two cheaper alterna-
tives. If policy makers could resort to easier trade taxes to avoid negotiating
with workers, they too could let firms fund insurance through social con-
tributions and non-monetary benefits, such as housing.
In that sense, the stratification of the labor market and income taxation
became intertwined. The nub of this intersection laid in two collective
action problems. The first concerned the free rider problem of income
taxation. Although progressivity was increasing, so were loopholes and
specific privileges to firms and individuals supporting existing govern-
ments. As a result, both tax avoidance and evasion became pervasive as
economic actors competed to woo tax officials and political patrons for
preferential treatment, and the ensuing tax codes became more complex
(Herschel, 1977; Oszlak, 1970; Resk, 1969). This situation undermined
cooperation and the commitment to invest in administrative capacities to
spread the fiscal base.
The second involved a moral problem with regard to labor market insur-
ance. To mediate distributional conflict and gain workers’ loyalty, insurance
became stratified to favor better-organized groups. Organized workers
would strike and court governments to force employers to increase wages
and insurance. Governments would typically offer further tariffs and pro-
tection for firms to comply. Competition between and within unions pre-
cluded class solidarity. States gained cooperation by selectively associating
with supporters, excluding the rest. Note, however, that protected workers
themselves would have required to increase their own contribution in order
to include a larger section of the working class in social programs.13
Stratified insurance deepened the divide between formal and informal sec-
tors while, at the same time, raising the labor costs of protected firms
(Drake, 1996; Haggard & Kaufman, 2008; Roxborough, 2008).
Stratified inclusion meant further complexity in insurance systems,
prevalent evasion, and regressive outcomes. By the early 1970, Mesa Lago
calculated that the Chilean system of social insurance, then one of the
most advanced in the region, exhibited 30% more members in different
protection schemes than contributors; while in Uruguay, the state
exploited these same gaps to avoid contributing to social insurance (Mesa-
Lago, 1985, pp. 114, 199).14 Instead of fomenting compliance, this situ-
ation offered opportunities to receive insurance while avoiding social
contributions, and crucially, income taxation was not explicitly geared up
to fund social insurance.
The struggles to enact the income tax epitomized these collective
action problems and the many conflicts present in Latin American societ-
ies. Table 4.2 describes some features of income tax discussions and their
political consequences. Most income taxes were passed through decretos
by emergency governments or non-democratic regimes during the 1920s
Table 4.2 Motives and political consequences of personal income taxation
106
Country Party coalitions Urban employer position Rural position Working-class Political consequence
position
Argentina Decreto by policy Cooperation (of landed Divided: interior Against tax on Conflict between
makers. Conservative and industrial economic landowners (interior wages. Supported a federalists and
origin (Uruburu’s elites) oligarchy) were against class tax centralists; lack of
dictatorship, ratified by income tax. trust in the state
Congress in 1933); But other non-interior
Socialist opposition elites consented
Brazil Income tax was decreed. Against, non-cooperative. Against; regional Fragmented unions Conflict between
A. BIEHL AND J.T. LABARCA
Conflict among elites Regional conflicts and conflicts (urban vs. supported a class local states and
along regional lines fragmented class relations rural) tax urban/rural groups
Bolivia Decreto Divided elites Divided elites. Fiscal Not clear; not Conflict between
structure generated included in export classes and
competition between discussions or the state. Upper
mining elites (tin affected by the tax
classes support state
producers) and state makers initially to
officials fund the state
Chile Decreto. Liberal and Indifferent on tax; Support (at least Fragmented unions Taxation on incomes
conservatives supported supportive as long as they initially) supported a class does not lead to
a class tax. Socialists saw tax as part of industrial tax and economic political clusters.
supported class tax and protection nationalism New discussion
rejected taxes on wages about taxation of
natural resources
Ecuador Decreto by Revolución Chamber of commerce Against Supported a class Taxation on income
Juliana and agriculture were tax does not lead to
against political clusters
Mexico Liberal-progressive Against. Nevertheless, Against Supported a class Confrontation
supported tax as a business groups lacked tax between local and
symbol of the ideals of cohesion both between central elites during
the Mexican Revolution and within sectors construction of the
(National Confederation federal state
of Chambers of
Commerce and National
Confederation of the
Chamber of Industry were
the most important).
Fragmented opposition
Colombia Income tax acts of Against. Asociación Against (particularly the Supported a class Taxation on income
1918, 1927, and 1935 Patriótica y Económica ‘cafeteros’ and landed tax does not lead to
reacted to failing Nacional (APEN)’ was elites) political clusters. It
revenue from formed in 1935 in is considered a fiscal
international trade. opposition to the tax. need
Conservative origin in Attempted to agglutinate
1927, liberal different economic actors
continuation in 1935. against reform
Differences between and
within parties related to
graduated tax rates
Sources: Own elaboration with information from CEPAL (1956, pp. 142–153); Unda Gutiérrez (2017); Sánchez Román (2012); Paz y Miño Cepeda
(2015); Díaz (1997); Mora Toscano (2013); Marshall (1939); Gallo (1991); Lieberman (2003)
GLOBAL UNCERTAINTY IN THE EVOLUTION OF LATIN AMERICAN...
107
and 1930s period of global uncertainty. The sudden impact of these crises
constrained the time devoted to deliberation over the fiscal pact. However,
despite the absence of democratic debates, opposition to income taxes was
less obstinate than could be expected. Naturally, organized wage earners
and newly created Socialist parties fought to be exempted, and won.15 And
yet, industrialists and some landowners consented to income taxation.
Taxation did not threaten their workers’ loyalty as they were tied by
paternalism.
In Argentina, the income tax was primarily a conflict between federal-
ists and centralists: landowners in the interior regions resented the central-
ization of taxes, but large, estancieros in and around Buenos Aires did not
oppose income taxation or other progressive policies (Hora, 2001;
Sánchez Román, 2012). The Argentinian example further illustrates the
nexus between elites and state investment. As long as elites saw the gov-
ernment working to their benefit, during the so-called ‘infamous decade’
of rigged elections and conservative rule, the income tax commanded
legitimacy and bred compliance. Similarly, in Brazil, income taxation gave
vent to entrenched regional struggles. This pattern can be found in more
centralized states such as Chile, where income taxation exposed the divi-
sions within political and economic elites in metropolitan and provincial
areas. Table 4.2 shows that antagonism or indifference toward the tax
stemmed from a variety of motives across the region.
It would be easy to put the stagnation of income taxes down to their
original sin, the absence of political representation and public deliberation
at the time of their inception (e.g. Sánchez Román, 2012). However, the
available information does not support the argument. In Argentina, the
tax was increasingly productive as long as the taxpaying elites saw the state
working in their favor. The tax stagnated through a double process. Once
Juan Domingo Perón became president in 1946, he resorted to easier
short-term policies to fund a fast program of domestic industrialization.
To that end, he introduced a state monopoly on the export of livestock
products, manipulating the exchange rate paid to producers, effectively a
tax on exports, and price controls. Despite increasing its progressivity,
Perón’s administration did not invest in the income tax, which lost credi-
bility as it became arbitrary (Sanchez, 2011, Chapter 3). As a result, the
main economic actors systematically avoided the tax. On comparative
grounds, plenty of income taxes that work to this day were introduced
under undemocratic regimes.16
The income tax remained volatile and expressed how states administered
both internal conflicts and their exposure to global uncertainty. We explain
this volatility in terms of the political consequences that the tax brought
about and that are listed in Table 4.2. A limited tax base meant that the tax
could not alter the stratification of Latin American societies as it taxed the
rich and remained unrelated to a long-term social objective (e.g. taxes for
insurance or social spending). While income taxation grew in Europe and
the United States, in Latin America it emerged to rescue a weakening state.
The income tax was seen just as a tool for a generic need of state revenue,
and not for a concrete set of policies. The tax became constantly modified
to respond to fiscal emergencies, while evasion became prevalent in both
tax systems and labor market social contributions. A well-defined social
objective would have provided the motive to use it legitimately as an instru-
ment to collect and redistribute income in the long run.17
Latin American income taxation vaguely delimited citizens’ obligations
as it was always easier to rely on cheaper options for revenue and insurance.
In Western nations, the income tax became a mass tax as it expressed the
shared sacrifice incurred in wars and deep distributional conflicts (Scheve &
Stasavage, 2016; Steinmo, 1993). It derived its legitimacy from the demar-
cation of civic obligations. In Latin America, in contrast, the state and the
fiscal pact drew legitimacy from social spending (Cousiño & Valenzuela,
2012; Lewis & Mitchell, 2008). Without a stable fiscal domestic pact,
spending became volatile and pro-cyclical as well (see Azar & Fleitas, 2012).
Through the lenses of taxation, one can conclude that the Latin American
state is legitimate as long as it can spend, not as long as it can tax.18
Nonetheless, social spending alone could not transcend class divisions as
it became targeted and stratified precisely in order to foster loyalty from
crucial economic and political actors (Drake, 1996; Finch, 1981; Oxhorn,
1998). State patronage extended to pockets of the working class and eco-
nomic entrepreneurs. State legitimacy was achieved through social spending
and economic protectionism, both financed mostly through taxes on natu-
ral resources managed by foreign companies, customs, price controls, and
inflation. Social inclusion became a form of ‘controlled inclusion’ (Oxhorn,
1998), as it avoided a collectively constructed fiscal and political pact.
Without stable domestic taxation, Latin American states internalized
uncertainty by taxing trade, making them fragile to external events.
Domestic fiscal pacts were in turn driven by short-term taxation and
spending. Even if redistribution was occasionally achieved, it was more
difficult to break the mechanisms that transmit inequality, for example
through long-term investments on human capital or insurance (Altimir,

1994; e.g. Altimir & Beccaria, 2001; Frankema, 2010, 2011). Paradoxically,
economic policies after the global crises of the early twentieth century
were guided by inner-development and import-substitution strategies, all
of which could not break the economic dependence of the global econ-
omy as the main means to fund the state.
5 Discussion
A recent report notes that income taxation is somewhat irrelevant in Latin
America. After two decades of strong growth, general consumption taxes
such as the VAT account for 28% of revenue in comparison with 8.7% on
personal income taxes. For OECD countries, these figures are 20 and 24%,
respectively, and the difference in social contributions is greater (OECD/
ECLAC/CIAT, 2017). Although the report displays a lot of internal varia-
tion, it confirms that light personal income taxes still characterize the fiscal
pact of many Latin American countries. Today’s meager income taxation
stems from the historical processes discussed in this chapter. Note that
modern Welfare states compensate regressive taxation with progressive
expenditures; regressive taxation is required to fund increasing demands
for social insurance (Kato, 2003). The Latin American model is distinct in
this respect. Absence of mass direct taxation signals the state’s continued
exposure to uncertainty and, lately, the consolidation of a regressive fiscal
pact through consumption taxes with little progressive spending.
The fiscal crises of the 1970s and 1980s, which put an end to import-
substitution strategies, left states with new taxation tools to compensate
for the loss of trade. As countries opened up to the global economy, low-
ering tariffs and export taxes, revenue was sought through mass indirect
taxes on consumption, mainly the VAT (Mahon, 2004). Although these
taxes were generally successful (e.g. Bird & Gendron, 2007), they were
again the product of technical guidance with little public deliberation,
often under military administrations. As they remain concealed in con-
sumption goods, they are less visible and therefore, less contentious.
Despite shielding the state to global uncertainty by raising revenue from
domestic sources, these taxes bear disproportionately on the incomes of
the poor. So, while consumption taxes are efficient, cheap to administer
and monitor, and have provided the state with resources to spend in times
of crises, their political implications are more problematic.
Take two neighboring countries that have pursued different strategies

over taxation in the last decades: Argentina and Chile. The Chilean state has
become less fragile over time as it derives its revenue from domestic sources
(even if its economic sectors are heavily tied to the global economy). With
negligible taxes on trade, in the 2010s it collected almost 30% taxes on
incomes, profits, and capital gains, but more than 43% in indirect taxes on
consumption. Beset by noncompliance, the Argentinian state takes about
16% of its revenue from trade taxes, but only 19% from direct taxation, and
29% from VAT (World Bank (2014a, 2014b). Perhaps the fiscal pact is less
regressive in Argentina, but certainly more fragile. Both nonetheless, depend
heavily on mass consumption taxes that are easier to monitor and collect (but
see Bergman, 2009).
Given that domestic taxes were not tied to any social objective, the two
countries looked to their labor market to process economic uncertainty.
They still count on their firms and employers to provide contributions to
private or public insurance firms (e.g. for pensions and health). This in
turn assumes an equivalent capacity to save among wage earners through-
out their working lives. These assumptions of both large firms and an
individual disposition to save, square poorly with significant levels of infor-
mality, job transitions, and high labor costs in the formal sector (World
Bank, 2014a). Not surprisingly, taxes and spending do little to reduce
inequality in the long run (Chu, Davoodi, & Gupta, 2004; Goñi, López,
& Servén, 2008).
There is a hidden cost to invisible taxation, in that state and labor market
actors have been forced to employ other, perhaps less efficient, forms of
insurance. Income taxation remains stratified by class; only those subject to
pay income and payroll taxes are entitled to private or public insurance.
Naturally, Latin American countries have funded and adopted policies of a
more ‘universalistic’ kind to break the connection between contribution
and insurance. This makes sense in labor markets beset by informality and
little individual capacity to save. However, this also means that access to
good insurance remains stratified. As informality becomes a means to adapt
and administer uncertainty, interpretations can stress its innovative poten-
tial, the flexibility for women and individuals to change jobs, or lament its
insecurity and negative long-term consequences. But informality is cer-
tainly not good for state revenue (Centeno & Portes, 2006).
The legacy of the early personal income taxes in Latin America is clear:
it remains a class-tax, targeting only the richer portions of society. While
the Welfare state rests on mass taxation (at first direct, then increasingly
indirect), Latin American states never expanded the base and capacities
of the personal income tax as they lacked a compromise on social
expenditures.
Naturally, as this book makes clear, this does not mean that capital and
profit income taxes are necessarily high or set at desirable rates. What it
shows is that Latin American taxation systems, as a whole, are regressive
partly because of the unintended political consequences of having a class-
based personal income tax. The absence of a mass income tax, one that
truly permeates society, shapes political bargaining by taking the whole
question of taxation out of democratic and public deliberation. In agree-
ment with the tenets of this volume, this chapter shows that although fair
contributions from the elites are crucial to sustain a more egalitarian soci-
ety, they fall short of producing a long-term and sustainable fiscal pact. A
sustainable pact needs to protect the state from uncertainty by tapping
into more diversified sources of revenue. This is a lot easier when it links
visibly citizenship, and its obligations, to social policy and the state thus
providing long-term legitimacy.
Transnational events have historically shaped the trajectory of Latin
American states and labor markets. By looking into the economic crises of
the 1920s and their effect on internal discussions over domestic taxes, we
can better grasp how labor markets continue to process global uncertainty
while taxation and insurance remain stratified. The resulting fiscal pact has
not made explicit and clear the obligations of citizen to state, and state to
citizen. Latin American economic actors still face collective action prob-
lems to sustain long-term agreements on insurance and taxation, while the
state retains some legitimacy through spending, not taxation. The techni-
cal efficiency of the VAT does not compensate for the loss of visibility of
state–citizen nexus (Atria, 2014).
Income taxes stem from international events that put an end to stable
economic expectations over growth and insurance. States throughout the
1920s and 1930s attempted to transform the economies of Latin America
by promoting internal industries while clinging to the illusion of low
domestic taxes and a future return to commodity booms. The sole objec-
tive of the tax was revenue to compensate external deficits. The tax could
not become a growing presence of Latin American fiscal pacts as it was not
tied to a permanent social objective. Social policies, labor markets, and
taxation were discussed separately. Not surprisingly, state institutions
could not mediate successfully global uncertainty. Industrial gains during
the twentieth century went hand in hand with economic instability. Social
protection of formal employment did not include an expanding informal

sector. High inflation and mounting social polarization characterized most
of the second half of the twentieth century. To explain why the state could
not mediate uncertainty, we need to understand the historical origins and
evolution of domestic taxes, i.e. the fabric of the modern state. The state’s
current reliance on VAT and other consumption taxes provides a palatable
solution to state revenue, but with lingering effects on inequality and
political participation.
Notes
1. On Prebisch’s mission, Dosman (2010, pp. 48–50), Prebisch (1991a,
1991b).
2. For fragility and uncertainty we follow Taleb (2010, 2013). See also Japp
& Kusche (2008).
3. Even if the threat of war might sporadically increase the total revenue in the
twentieth century (Thies, 2005), the form of taxation remains the same.
4. However, US colonies were heavily subsidized by the United Kingdom
(Elliott, 2006). What is more, the pattern of Latin American taxation
under the duress of war resembles the reaction of Confederate states dur-
ing the American Civil war. Attempts to introduce income taxes are
defeated in favor of an export tax on cotton while the Union successfully
introduced an income tax (Webber & Wildavsky, 1986).
5. Reciprocity could be formalized either through negotiated rules or by
feeding into a shared sense of nationhood (Bräutigam, 2008; Lieberman,
2003; Martin, Mehrotra, & Prasad, 2009).
6. Those public services were often financed through indirect regressive taxa-
tion, but as part of a politically constructed fiscal pact (Kato, 2003;
Steinmo, 1993).
7. The share of exports to the United States was particularly important in
Central America. European economies, especially Britain, took most of
South American exports (Bulmer-Thomas, 2003). Fall in export prices
affected revenue in the entire Latin America with the arguable exception of
Honduras and Venezuela where foreign companies left little in terms of
tax. In general, exporters of minerals suffered more than exporters of agri-
cultural and pastoral produce.
8. This is naturally a permanent feature of many export-oriented economies
and is often referred to as a resource curse. One of the consequences of
having a small subset of exports is the fact that it is difficult to jump ship
when a commodity is devalued.
9. Short-lived income, profit, and inheritance taxes were replaced by indirect
taxes on consumption (Finch, 1981, pp. 259–260; Harberger, 1989).
Uruguay was slow to enact income taxes although it boasted some land
taxes and some sale taxes on alcohol. Tax exemptions were used to buy the
loyalty of caudillos as the state became centralized (López-Alves, 2000,
2002). Anticipating little compliance from landed elites, the Uruguayan
state relied on export taxes.
10. Although this pattern is not unique to Latin America, see Bird & Oldman
(1968, pp. 10–11); Lee (1978); Levi (1988); and Oszlak (1970).
11. A compelling comparison is the discussion over income taxation in the
Soviet Union as Soviet policy makers saw these same problems in class taxa-
tion (Kotsonis, 2004, p. 563; Davis, 1967, p. 307; Nove, 1993, p. 357).
12. For data on personal income taxes and inequality see Aaberge & Atkinson,
2010; Alvaredo, 2010; Atkinson & Leigh, 2007a, 2007b; Borge & Rattsø,
1997; Roine & Waldenström, 2010.
13. As Horowitz (2008, pp. 105–114) shows that both labor and capital
opposed an act that aimed to implement a universal pension system because
including new workers in insurance required more taxes. This contrasts
with Scandinavia, where unions in richer branches of industry subsidized
poorer unions to foster compliance with collective agreements (Galenson,
1969, 1970).
14. Naturally, Latin American countries tried to adapt stratified insurance
from Germany and France. These depended on large industries where
both employers and employees could contribute to social insurance. These
systems also generated inequality but evolved toward more universal
inclusion (Baldwin, 1999). Latin America, in contrast, protected few, and
moves toward increasing spending met with fiscal crisis and little solidarity
from workers.
15. Interestingly, the left had the same problem in Australia. War and the need
for progressive taxation to fund social insurance convinced the left to
accept income taxes on wage earners (Robinson, 2005).
16. Other explanations concern the extent of the wage economy in Latin
America. Particularly, income taxpayers are only possible if the economy is
monetized. Although this affected predominantly rural workers, other coun-
tries were successful in enlarging their tax bases despite a large proportion of
their labor force working in agriculture (e.g. in Oceania or Scandinavia).
A better explanation might be the chronic inflation experienced by these
countries. Inflation reduced the tax burden and increased evasion.
17. An example of this is the first universal pension reform in Sweden (Edelbak
& Olsson, 2010).
18. For instance, the Chilean government used to approve spending before
taxation from the 1920s to the early 1970s. Hence, it was difficult to make
taxation a visible component of social reciprocity and gain legitimacy
(Arellano & Marfán, 1989).
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CHAPTER 5
International Insertion, Volatility and Fiscal

Resources in Countries Specialized
in Extractive Industries: Between a Rock
and a Hard Place?
Juan Carlos Gómez Sabaini, Osvaldo Kacef,
and Dalmiro Morán
1 Introduction
Latin American economies are particularly volatile. This characteristic is
largely associated with a chronic shortage of foreign exchange that under-
pins the region’s characteristic stop–go growth style,1 where it is usual for
growth periods to ultimately conclude with a balance of payments crisis.
In turn, the chronic shortage of foreign exchange is linked to an inter-
national mode of economic insertion that is heavily specialized in the
The authors express their gratitude to Juan Pablo Jiménez, Miguel Angel
González and Ignacio Ruelas for their valuable support, comments and
suggestions.
J.C. Gómez Sabaini (*) • O. Kacef

University of Buenos Aires, Buenos Aires, Argentina
D. Morán
National University of La Plata, Buenos Aires, Argentina

DOI 10.1007/978-3-319-60119-9_5
124 J.C. GÓMEZ SABAINI ET AL.
production of raw materials, whose international prices have shown high

volatility in the short term. In the current situation, the region has partly
reversed the process of diversification occurring before the boom period
that allowed the countries to increase manufacturing exports. This rever-
sal meant further increasing the share of primary goods and non-renew-
able resources (NRR) against intensive products in the export structure.
Toward the end of the 1990s, but especially since 2003, prices of Latin
American export products showed a growth pattern that not only allowed
a greater availability of foreign exchange for the financing of growth, but
also—through various tax reforms—allowed the collection of additional
resources to increase fiscal space. This enabled Latin American countries
to attend to some social and investment challenges. During the last decade,
tax reforms focused on these extractive sectors have accentuated a growing
specialization of regional tax systems in natural resources, especially in
countries that are producers of oil and minerals (Gómez Sabaini,
Jiménez and Morán, 2015). The evolution of tax revenues, closely linked
to the production and trade of these products, has shown strong fluctua-
tions in countries of the region that specialize in these activities. This trend
of tax reform emerged as a policy response to the upward cycle of prices
between 2003 and 2008. During that period, progress was made to ensure
state control of available resources; new taxes were introduced, royalty
schemes were strengthened, and windfall taxes were established.2
This has meant that the average volatility of tax revenues in the region,
measured by the standard deviation, is much higher than among devel-
oped countries.3 The influence of external shocks in the aforementioned
revenues (and also in spending, especially in energy-importing countries)
limits the ability to stabilize in the case of an international shock, while
also reducing tax revenues and domestic product. Given the volatility of
commodity prices, the current situation not only tends to further increase
the vulnerability of the region’s economies, but it also affects the stability
of fiscal resources, threatening to reduce the space for the implementation
of anticyclical or social protection policies.
The change in the price cycle trend of these products from 2013
onwards means not only a decrease in the fiscal relevance of these reve-
nues, but also a rethinking of the objectives to be followed and the tools
to be used to prioritize not only the fiscal result, but also sustainability in
the sector’s investments and production.
It will be seen that international volatility affects Latin American coun-
tries through the same channels and thus similar consequences should be
INTERNATIONAL INSERTION, VOLATILITY AND FISCAL RESOURCES... 125
expected for the countries in the region. As discussed in the introduction

of this book, tax experiences in Latin American countries are highly het-
erogeneous. This means that fiscal responses may vary from country to
country, reinforcing other impacts by undermining the sustainability of
public accounts. This raises the question of what to do to sustain the level
of fiscal revenue when facing the downward trend of prices for NRR, con-
sidering that these resources account for the bulk of the tax base of many
countries in the region. Recognizing the importance of the transnational
dimension for tax regime dynamics in Latin America, the present chapter
tries to establish and clarify how tax systems in the region are partly deter-
mined by the mode of international economic insertion. This clarification
is necessary as there are different effects derived from the various tax
instruments among NRR that highlight the importance of considering
not only the aggregate, but also the mix of fiscal impacts.
According to the Economic Survey of Latin America and the Caribbean
(ECLAC, 2015), an important factor that could shift the downward pro-
jection of regional exports is a country’s exposure, direct and indirect, to
China’s economy. Given the size of a country’s economy, its weight in
global economic activity and its demand for raw materials, the health of
China’s economy and the question of whether growth might slow more
than forecasted is a future latent risk. In addition to the indirect effect of
Chinese demand on Latin America and the Caribbean through its impact
on commodity prices, there is also a direct effect on the external demand
of various Latin American countries where China is a very important
export market. If exports account for a significant part of these countries’
economic activity, then their exposure to a slowdown is naturally greater.
Motivated by this background, the link between international eco-
nomic insertion of some Latin American countries—characterized by high
concentration in the export of NRR—the fluctuating evolution of com-
modity prices and the performance of tax revenues (in terms of level,
structure and volatility) is discussed. In addition, an analysis of the type of
challenges that this development faces is provided. First, the issue of
volatility in Latin America will be presented, with particular emphasis on
the role played by extractive industries in several countries that exacerbate
macroeconomic fluctuations. Moreover, an attempt is made to identify
different dimensions through which this volatility is revealed, amplified by
the concentration of production in the exploitation of NRR, while explor-
ing the implications of this phenomenon on the available flow of fiscal
resources.
Second, the different policies regarding taxation in both mineral and oil
sectors followed by the governments of the countries under analysis will
be reviewed. The analysis will also include updated statistical data to illus-
trate recent developments and the great relative weight of these resources
and high fluctuations in several countries. The countries chosen for this
analysis are Bolivia, Chile, Colombia, Ecuador, Mexico, Peru and
Venezuela as these are the major exporters of the region and where fiscal
revenues (tax and non-tax) derived from the exploitation of NRR are
highest, in relative terms.4
Through a transnational perspective, the chapter shows how tax sys-
tems in the region are partly determined by the international insertion,
thereby highlighting the importance of considering not only the aggre-
gate but also the differential impact of different fiscal tools. The chapter
concludes by arguing the need for further efforts to balance the multiple
challenges and trade-offs derived from this international insertion and fis-
cal specialization in natural resources. The question posited is how to
build a sound, sustainable and diversified tax system capable of maintain-
ing reasonable investment dynamism, and simultaneously achieving a pro-
gressive state participation in economic rents derived from natural resource
extraction. This challenge also includes achieving an adequate sharing of
risk between governments and investors and assuring compliance with a
reasonably low administrative cost.
2 Volatility and Natural Resources

in Latin America
2.1 Volatility Sources and Some Consequences

In this section, some stylized facts about volatility will be presented in a
comparative perspective that allows an appreciation of the magnitude of
volatility experienced in the region. This is followed by discussion of the
main sources of volatility, highlighting the role of the international inser-
tion upon its amplification. Finally, some consequences of volatility over
different dimensions are presented and the exacerbating fiscal policy
responses are discussed.
Latin America has been characterized as a region with a level of macro-
economic volatility that is much higher than that registered by developed
economies. This high level is considered to be one of the main reasons
behind the poor performance of Latin American economies over the last
few decades (Cárcamo-Díaz & Pineda-Salazar, 2014; Hausmann & Gavin,

2011). The level of macroeconomic volatility is associated with various
elements, such as international economic insertion, production structure,
economic policy, natural disaster vulnerability, and institutional arrange-
ments, among others (Jiménez & Kacef, 2011; Loayza, Ranciere, Serven,
& Ventura, 2007), and this characteristic has an impact on different and
intertwined economic dimensions.
Latin American economies are highly dependent on commodity pro-
duction and exhibit very concentrated export structures. This may be
due to geographic factors such as remoteness or natural resource abun-
dance, facts that in conjunction with trade openness and a relatively poor
institutional quality amplify macroeconomic volatility through the terms
of trade (Jansen, 2004; Malik &Temple, 2009; Rodrik, 1997). Highly
concentrated export structures assume an absence of portfolio effects5
(in the sense of financial theory) that can bring with them less-volatile
export earnings and hence less variability in gross domestic product
(GDP) growth.
It is highlighted that macroeconomic volatility could be related to com-
modity dependence through a structural channel, whereby exports con-
centration can lead to terms of trade volatility that manifest as variability
in the growth of per capita income or consumption. In particular, these
booms are associated with general equilibrium effects (price and income
effects) that shrink part of the tradable sector of the economy6 to a partial
process of de-industrialization that has different impacts among different
tradable goods. In this regard, some evidence suggests that, at a global
level, greater export concentration is somewhat associated with being a
net exporter of mining or energy commodities (Lederman & Maloney,
2012; Lederman & Xu, 2010; UNCTAD, 2012).
Complementary to the previous hypothesis, commodity dependence is
also associated with institutional weaknesses that make governments inca-
pable of managing external volatility. This so-called mismanagement
hypothesis leads to a pronounced transmission of the mentioned terms of
trade volatility toward income and consumption. This is related directly to
the governance of natural resources exercised through formal institutions
(constitutional frameworks, laws, fiscal context and sectoral regulation,
among others), informal institutions (implicit rules in practice of common
use) and sovereign political decisions, whose joint actions rule the opera-
tion of the extractive sectors. Governance of natural resources determines
property regimes (e.g., concession laws), tax treatment (specific for these
sectors) and mechanisms of savings and distribution of the revenue

obtained from these sectors (investment and stabilization funds), as well as
other management functions associated with the extractive sectors
(Altomonte & Sánchez, 2016).
Poor natural resources governance is consistent with the hypothesis of
the “voracity effect” in which economies that lack an adequate institu-
tional framework and are subject to terms of trade shocks, experience
slower growth due to a rent-seeking behavior on the behalf of the authori-
ties.7 Acemoglu, Johnson, Robinson, and Yunyong (2003) show that high
macroeconomic volatility may actually be associated with poor extractive
institutions inherited from the European colonial period,8 a fact that also
applies to Latin American countries. Following this line of thinking,
Leong and Mohaddes (2011) argue that resource rents enhance real out-
put per capita, but their volatility exerts a negative impact on economic
growth and shows that better institutions can ameliorate some of the neg-
ative volatility effects of some resources rents. In a broader sense, Melhum,
Moene, & Torvik (2006) claim that the natural resource curse is absent in
countries with adequate institutions.
Also related to the international mode of insertion of Latin American
countries—and as seen in Fanelli and Jiménez (2011), Cárcamo-Díaz and
Pineda-Salazar (2014) and Jiménez (2015)—the available evidence regard-
ing Latin American countries shows that external shocks have been related
to trade or capital flows. As trade shocks have been more pervasive in coun-
tries with high degrees of export concentration, economic vulnerability
increased relative to changes in the terms of trade and dependence upon
tourism, emigrant remittances, and Foreign Direct Investment. Shocks on
capital flows had a stronger and recurrent impact in countries with greater
dependence on external financing (i.e., countries with large current account
deficits or large debt financing needs), that were more dollarized, with
inflexible exchange rate regimes, and with weaker financial systems.
Like most emerging markets that are subject to a greater volatility in
capital flows (Broner & Rigobon, 2006), Latin America has experienced
strong reversions of these so-called “sudden stops”. This was often associ-
ated with a contagion phenomenon which generated turbulent periods
affecting numerous countries within the region (Agosín & Huaita, 2012;
Calvo, Izquierdo, & Talvi, 2006; Fanelli, 2008). These aggregate fluctua-
tions were often accompanied by pronounced changes in the sustainability
of public and external debt and fragility of the financial system. Although
some recent evidence shows a greater resilience to slowdowns in capital
flows—a resilience that is built upon a buffer effect of deployment of
international reserves (Bems, Catao, Kóczán, Lian, & Poplawski-Ribeiro,

2016)—disturbances that have permanent and not just temporary effects
on the economy are frequent. Those that induce permanent mutations are
related to episodes of crises, changes in economic structures (external
shocks and institutional changes) and shocks that influence the long-term
trend. The growth and volatility of GDP have been influenced by numer-
ous crises faced by all Latin American countries, especially since the 1980s.
These episodes of extreme volatility have been frequent and often accom-
panied by productive collapses, or at least an interruption of accelerated
growth processes.
Following the seminal work of Ramey and Ramey (1995), several stud-
ies have found empirical evidence of the permanent negative effects of
volatility on growth, also finding that these effects can offset those of the
bonanza cycles (Cavalcanti, Mohaddes, & Raissi, 2011). Nevertheless,
there are other impacts of special relevance for the region. In particular,
volatility can adversely affect welfare, income distribution and poverty, and
through these channels macroeconomic fluctuations can have a negative
effect on democratic governance. Volatility also can be reflected dispro-
portionally in consumption variability.9
The cost of volatility over welfare can be measured in terms of the per
capita consumption loss that it generates. The most direct impact is
through lower economic growth. Volatility generates the creation and
destruction of wealth through changes in relative prices and changes in
property rights, which may bring disincentives in investment that nega-
tively affect growth and employment through an increased uncertainty. As
a systemic phenomenon, it damages the overall investment rate by increas-
ing the risk premium for all projects, weakening the investment climate.
Thus, volatility acts as a tax that increases the cost of capital for all firms
(Fanelli, 2013), its impact is also greater than in other economies because
of the absence or underdevelopment of financial markets (with the excep-
tion of Chile). In this context, transaction costs are high, there are tight
restrictions on long-term credit and it is very difficult to manage risks.
High consumption fluctuations imply that poverty is also very volatile,
especially when a large proportion of the households in the region is close
to the poverty line. In these circumstances, a relative decline in consump-
tion may leave many people below subsistence levels. In addition, and
directly related to the purpose of this chapter, the high volatility of macro-
economic variables has a significant impact on fiscal revenues through fluc-
tuations in the taxable bases of GDP, consumption, or basic product prices.
In this sense, the performance of the regional economies has been

driven by an environment in which the main players—entrepreneurs,
workers, investors and the state—faced considerable fluctuations in aggre-
gate demand, economic activity and macroeconomic prices, with this
instability having recessive and regressive effects. This is related to the
inflexibility of prices, the presence of incomplete factor markets, and the
profound structural heterogeneity of the economies in the region. This is
one of the main causes underpinning larger disparities between aggregate
demand and supply, with the consequent recurrent gap between the
potential productive capacity and its uses. This is particularly the case in
the “stop” stages that follow the “go” stages (Ffrench-Davis, 2010) that
characterize the pattern of growth of Latin American economies.
The macroeconomic volatility which has characterized Latin American
countries is thus a complex phenomenon related to different factors that
include the bad quality of fiscal policies which, according to an ample
body of evidence, are highly procyclical and tend to amplify volatility
throughout the region (Gavin & Perotti, 1997; Klemm, 2014). As will be
highlighted in the next section, this problem could be amplified by the
intrinsic characteristics of the commodities of price fluctuations and
exhaustible reserves in countries specialized in NRR.
2.2 Non-Renewable Natural Resources in Latin America:

Specific Implications
Latin American countries have traditionally been a major world supplier of
energy and mineral resources. In 2015 the region contributed the 11.2%
of the world production of oil, and it possesses nearly 20% of the world’s
proven reserves. Meanwhile, Chile and Peru jointly accounted for the 39%
of the world production of copper.10 Particularly in the group of analyzed
countries, with the exception of Mexico, exports baskets are dominated by
mineral or oil products. Remarkably, this is the case for Chile, Colombia,
Ecuador, Peru and Venezuela where, according to data from
UN-COMTRADE at the 4-digit level Harmonized System for the year
2014, such products make up from 40% to nearly 80% of total exports.
Among other events, the rise in international demand caused by the
emergence of China in the world markets favored a significant growth in
the value of exports of various Lati-American countries. This contributed
to the improvement of their macroeconomic performance and their fiscal
position. Although this cycle of prosperity was drastically interrupted by
the global financial crisis, in subsequent years the prices of these products
demonstrated a remarkable recovery that lasted during 2011 and part of
2012. The slowdown of the world economy since 2013, among other fac-
tors, has led to a correction in the price level and a moderation (and grad-
ual reversion) of the upward trend observed during the last decade.
In countries whose production structure is dominated by NRR, the
usual challenges of fiscal policy are generated by the intrinsic characteris-
tics of these commodities. In line with what has been discussed in the first
section of this chapter, the volatility and unpredictability of commodity
prices can complicate fiscal policy, making it difficult to determine an
appropriate and sustainable level of public spending. In addition, because
natural resource reserves are finite this means that fiscal policy design must
also provide for considerations of intergenerational equity.
Together with these characteristics, there are other factors which com-
plicate the assignment of revenue from natural resources between differ-
ent levels of government of the same country. One of these is the great
geographic concentration of the reservoirs, and therefore of the tax base.11
Oils and minerals are often discovered and exploited in sparsely populated
areas and this potentially creates huge horizontal imbalances if rents are
assigned exclusively, or mostly, to subnational governments. Large imbal-
ances stimulate political pressures and provide theoretical grounds for
national equalization of these resources (Brosio & Jiménez, 2012).12
Countries specialized in NRR are, however, far from being an homoge-
neous group. There are significant differences with respect to the non-
renewable product in which they have specialized. These include: the
importance of this product in the economy, its price variation, the size of
the resource reserves or deposits, the fiscal impact of the revenue from its
exploitation, the degree of diversification of the tax structure, the compo-
sition of expenditure, and the level of debt. All these characteristics are of
great importance for the design of an appropriate fiscal policy. These fea-
tures and differences result in a particular tax base on which the govern-
ments of the region are highly dependent. In addition, the same type of
NRR can have very different consequences over growth and sustainable
development in general, depending on the specific context in which they
are extracted (i.e., productive diversification, non-renewable resource gov-
ernance, macroeconomic framework), an aspect that increases the hetero-
geneity among them.
The appropriation of rents derived from the exploitation of NRR can
also be a challenge. This applies not just to the question of who must
appropriate them, as there are numerous ways in which this can be done,
all with variable efficacy. Additionally, those who manage the exploration
and exploitation technology have information that the state does not pos-
sess. This is an advantage during the negotiation of prices and contractual
conditions. Conversely, a delay may arise because of the need to invest
most of the capital at the beginning of the project. Appropriation of rents
is mediated by the governance structure and even in the case of similar
resources structures can differ because the institutional framework within
NRR governance is inserted and developed, and is subject to path-
dependent effects (North, 1993), highlighting even more the marked het-
erogeneity between countries of the region.
3 Main Fiscal Instruments Applied

in Extractive Industries
Over the past decades a strong diversification in the range of fiscal instru-
ments—both tax and non-tax—took place in extractive industries within
most countries. These instruments include royalties, resource rent taxes,
windfall taxes, corporate income taxes, and diverse forms of state owner-
ship. Each has its advantages and disadvantages with respect to the impact
on investor behavior, the degree of progressivity,13 the sharing of risk
between the government and investor, and the administrative and compli-
ance costs.14
Fiscal instruments can be differentiated between those based on earn-
ings (or any definition of income net of related costs) and those deter-
mined by the physical amount or the economic value of production,
regardless of whether they fall on reserves or on inputs and services used
in the exploitation. In addition, there are various mechanisms that enable
state participation, active or passive, in the production or profits of private
companies.
It can be said that in both the oil and mining sectors a robust fiscal regime
is one that produces a reasonable sharing of risk and economic rents between
the governments and investing companies over a wide range of outcomes
where prices, costs, and the quality of any discoveries are uncertain.15
As can be observed in Fig. 5.1, there are multiple trade-offs between
the different evaluation criteria of fiscal instruments (with the arrows indi-
cating stronger intensity of each one). Moreover, there is a permanent
tension between the objectives of maintaining reasonable investment
dynamism and concurrently achieving a progressive state participation in
Administrative Costs/ Compliance
Signature Production
Bonuses Bonuses
Stability/Government Risk
Neutrality/Efficiency
Fixed charges Fixed Royalties

and fees (Production) State
Participation
(Equity)
Taxes on Fixed Royalties
International (Ad valorem) Corporate
Transactions Production
Income Tax Sharing
Contracts
Consumption Tax
(VAT) and Tariffs
Contingent
Taxesbased on
Royalties (Prices)
profitability
Progressivity/Flexibility/Equity
Fig. 5.1 Evaluation criteria of the main fiscal instruments applied in extractive
industries
economic rents derived from natural resource extraction. In this sense,

some balance is required between them, especially regarding efficiency,
equity, fiscal revenue collection and administrative and compliance costs
(Guj, Bocoum, Limmerick, Meaton, & Maybee, 2014).
In particular, the right side of Fig. 5.1 illustrates how fiscal instruments
can determine the relative sharing of risk between the government and the
companies investing in a certain project. It is known that extractive indus-
tries must face a high-risk component as unexpected contingencies might
affect future production and/or profits. Taxes and other charges can
reduce this uncertainty by transferring part of the commercial risk to the
government.
In addition, due to asymmetries in some key information, governments
have exclusive knowledge of its own potential future decisions that may
affect the project. Then, in response to changing external conditions like
price volatility, among others, governments have incentives to act in an
opportunistic way by modifying the contractual terms they originally offer
to investing companies (Gómez Sabaini et al., 2015). This is not to say

that this is a simple and economical process but it is a possibility, as the
nationalizations of hydrocarbons in Bolivia and Venezuela have shown.16
In this regard, volatility has a potential double impact over the fiscal
regime. It may affect the predictability of the revenue stream from extrac-
tive industries which enables governments to budget with greater cer-
tainty, especially when commodity prices are highly volatile. It can be
noted that, although taxes based on profitability (like the so-called
“resource rent tax”) are widely recognized as the most economically effi-
cient fiscal instrument,17 this instrument makes the government revenue
stream highly susceptible to changes in project profitability (which is
mainly determined by international prices and private costs).
Conversely, because of the significant up-front capital investments
(sunken costs), fiscal instruments should be predictable and, ideally, stable
over the life of the mine or exploration site before any proposed private
investment takes place. Unanticipated fiscal changes may give rise to
potentially very damaging perceptions of “sovereign risk” and make it
harder for oil and mining companies to deal with high volatility.
Consequently, regimes based in royalties or taxes, as predominantly occurs
in Latin American countries, have an intrinsic weakness since governments
have the right to establish and often drastically change tax legislation.
Regarding the mineral sector, with the exception of CODELCO (a
Chilean state-owned enterprise), and opposed to what can be seen in the
hydrocarbon sector where state participation is more extended, produc-
tion is generally completed by concessions provided by the state to private
companies. In the sample countries, the corporate income tax applied to
companies in the sector, together with other specific taxes and the pay-
ment of royalties, are the main instruments of state participation in the
rents derived from mining economic activity. This has been an historical
constant among the mining countries of the region. This stands in con-
trast to the hydrocarbon sector where more sophisticated developments
can be observed. The possibility of charging royalties to third parties over
every unit of resource extracted, in exchange for the right of exploitation,
emanates from the property that the state has over natural resources. The
values of the royalties can be determined by a wide range of parameters.
This can reflect the profitability of the exploitation, also incorporating a
component to account for the depletion of the deposits, or alternatively,
on the gross value of the extraction.
Although the alternative of relating the value of the royalty to profit-
ability is theoretically preferable, fiscal authorities in the region do not
have the institutional development and tax administrations that allow

them to carry out estimates of the profitability of exploitations. This rea-
son leads authorities to link the royalty with the gross value of the extrac-
tion, which is directly observable,18 implying that the royalty must be paid
independently of the existence of positive returns. Within the region, the
common practice in the mining sector is to use a royalty as a way to mar-
ginally increase the effective tax rate on corporate profits, to make the
mining sector pay a higher tax than companies from other sectors.
This configuration of the mining sector has profound economic and
historical roots that exceed the scope of this chapter. While the mining
sector is concentrated in large multinationals, the only mining company
that has survived over time has been CODELCO, and this has still needed
to appeal to private investment. In Bolivia, the control is by the state
(COMIBOL), but private companies providing services of exploration are
also involved. State ownership is not, however, free from conflicts and dif-
ficulties, and nationalization is not an option in most cases because of the
large investment costs involved.
Meanwhile, as mentioned previously, in the hydrocarbon sector direct
participation of the state is more extended, as can be observed by a greater
presence of state-owned enterprises (like PEMEX in Mexico, PDVSA in
Venezuela, or PetroEcuador in Ecuador) and production-sharing con-
tracts with a majority of state ownership (like Ecopetrol in Colombia), all
of which have a preponderant role in these countries’ economies. For its
part, the different dimensions that state participation has acquired in the
countries rich in hydrocarbon endowments include not only the direct
participation, but also an increasing evolution of fiscal regimes and instru-
ments to assure greater progressivity. In the latter case, it is common prac-
tice to apply scaled royalties and taxes on extraordinary profits (windfall
taxes) when the price surpasses a certain threshold. The utilization of risk-
or production-sharing contracts, among other instruments that assure a
wider and progressive participation of the state in the hydrocarbon rents
during price boom cycles, are also common (ECLAC, 2014).
4 Regional Industry-Level Analysis: Fiscal Impacts

and Fluctuations
The amount and stability of tax revenues from the hydrocarbon sector19 and
for the mining sector can be analyzed by utilizing different indicators that arise
from weighting the total amount of these resources (both tax and non-tax
basis) depending on some reference variables. In particular, the following

analysis considers the tax burden on the sector (percentage of GDP) as a stan-
dard measure of the magnitude and importance of fiscal resources involved.
Also reviewed is the degree of fiscal dependence (as a percentage of total tax
revenue) used as a measure of the vulnerability of state funding. The volatility
of fiscal revenues from both extractive industries for each country are explored
using the coefficient of variation as a proxy. This measure corresponds to their
standard deviation divided by the mean and attempts to capture the level of
uncertainty and variability associated with this source of revenue.
4.1 Hydrocarbons
Considering the first indicator (i.e. tax burden) it can be said that the
upward cycle in the international price of oil (particularly crude oil) that
began in the early years of the last decade led to an increase in tax revenues
from the exploitation of these natural resources in several countries in the
region. Their economic significance, however, differs among the
countries.
Table 5.1 presents, in the third column, the average values (accumu-
lated data calculated on the basis of current national currency) of the tax
burden represented by these resources in three different periods:
2000–2003 (before the upward price cycle), 2005–2008 (years of high
growth in international prices of primary products), and 2010–2014 (after
the international financial crisis of 2008–2009).20 A detailed look at the
available data allows us to assess the changes—in some cases, very impor-
tant ones—made in the structure of regional tax systems. Changes are
observable even though these tax systems are characterized by different
criteria regarding ownership of resources, state involvement in production
(with the participation of large state-owned enterprises) and the applica-
tion of fiscal instruments such as the tax on corporate income, royalties
and others.21 In addition, we can observe the marked heterogeneity that
characterizes these tax regimes for the hydrocarbon sector, as well as the
different economic strategies and political ideologies that countries show
in their efforts to achieve an adequate fiscal appropriation of a fraction of
the rents generated in these activities.
In terms of their fiscal burden, a glance at Table 5.1 allows us to iden-
tify three groups among the selected countries. In the first group compris-
ing Ecuador, Bolivia and Venezuela (in decreasing order of magnitude),
revenues derived from the exploitation of hydrocarbons have a high degree
of importance, reaching levels that are near or even above 10% of their
GDP for the last period considered (2010–2014). In the second group,
indicated by Mexico and Colombia, revenues from hydrocarbons were
also important, to a lesser extent, with values of 5.3% and 3.4% of the
GDPs, respectively. Finally, in Peru this source of revenue did not reach a
significant magnitude (at least relative to other sectors in the economy)
with values around 1% of GDP.
Table 5.1 also shows the structure of the relative shares of fiscal revenue
from hydrocarbon production in the six countries considered, establishing
the same three periods of the previous analyses. Largely because of the
reforms implemented during the period of booming prices, countries such
as Bolivia and Colombia exhibit tax regimes with some degree of diversi-
fication in their structure and with variable shares on corporate income
tax, royalties (usually fixed) and other more-specific instruments. This
contrasts sharply with the case of Peru, where the major part of the tax
revenues derived from its oil and gas sector come from royalties.
Another group of countries can be identified where other sources—
differing from corporate taxes and royalties—represent the biggest share
of hydrocarbon revenue. This is the case of Bolivia, Ecuador, Mexico and
Venezuela with 6.3%, 12.8%, 5.3% and 5.1% of GDP, respectively. In par-
ticular, Ecuador and Mexico represent two special cases where the fiscal
revenues from hydrocarbons, as a proportion of total fiscal revenues, are
null; nevertheless, tax revenues in the sector are linked more directly with
control mechanisms and operational management of the respective domes-
tic enterprises. Data for Ecuador are often presented as oil revenues from
the central government (for domestic sales and exports) without discrimi-
nation on the fiscal instrument; whereas in the case of Mexico, virtually all
revenue considered corresponds to rights on hydrocarbons (“derechos a los
hidrocarburos”) with a marginal share coming from the tax on returns.
Additionally, several of these countries show an uneven evolution of the
tax burden in the hydrocarbon sector. For example, thanks to structural
reforms made in the price boom period (e.g., the change of tax regime
with the creation of the Direct Tax on Hydrocarbons (“Impuesto Directo
a los Hidrocarburos”) (HDI) and the readjustment of royalties), Bolivia
took the average amount of tax revenue with values between 2 and 3
points of GDP in the 2000–2003 period, to values between 8 and 12% of
GDP from 2006. This unique trend was also recorded, with some varia-
tions, in Mexico, Ecuador and Colombia. Conversely, a recent decline in
oil revenues from the peak values reached in the years before the crisis has
been observed in Venezuela.
Table 5.1 Latin America (selected countries): Structure and relative indicators of fiscal revenues generated by the production of
hydrocarbons
Countries Source In proportion to GDP (%) In proportion to fiscal revenue (%) % of hydrocarbon revenue Coefficient
of variation
2000–2003 2005–2008 2010–2014 2000–2003 2005–2008 2010–2014 2000–2003 2005–2008 2010–2014 2000–2014
Bolivia Total tax 15.4 18.5 20.6 63.4 57.7 59.4 (:) (:) (:) 12.6%
revenue
Corporate tax 0.1 0.6 0.6 0.6 1.9 1.8 5.2 6.9 6.1 36.10%
Royalty 2.6 3.3 3.6 10.4 10.1 10.3 94.8 35.8 34.1
Others 0 5.2 6.3 0.0 16.2 18.1 0.0 57.3 59.8
Total 2.7 9.1 10.6 11.0 28.2 30.2 100 100 100
Colombia Total tax 14.3 17.2 22.9 49.3 59.0 80.6 (:) (:) (:) 20.6%
revenue
Corporate tax 0.4 0.7 1.1 1.3 2.6 3.7 22.9 30.9 31.1 46.40%
Royalty 0.8 1.0 1.2 2.9 3.4 4.1 51.2 41.3 33.9
Others 0.4 0.7 1.2 1.5 2.3 4.2 25.9 27.8 35.0
Total 1.6 2.4 3.4 5.6 8.3 12.0 100 100 100
Ecuador Total tax 15.2 18.3 22.2 70.3 67.8 58.4 (:) (:) (:) 17.2%
revenue
Corporate tax 0.0 0.0 0.0 0 0 0 0 0 0 43.10%
Royalty 0.0 0.0 0.0 0 0 0 0 0 0
Others 5.7 8.7 12.8 29.3 35.3 38.2 100 100 100
Total 5.7 8.7 12.8 29.3 35.3 38.2 100 100 100
Mexico Total tax 10.0 8.5 9.4 69.5 55.2 58.1 (:) (:) (:) 8.1%
revenue
Corporate tax 0.0 0.0 0.0 0 0.2 0.1 0 0.5 0.3 10.20%
Royalty 0.0 0.0 0.0 0 0 0 0 0 0
Others 3.0 5.9 5.3 21.1 38.1 32.6 100 99.5 99.7
Total 3.0 5.9 5.3 21.1 38.3 32.7 100 100 100
Peru Total tax 12.8 15.7 16.2 83.9 85.6 85.9 (:) (:) (:) 10.6%
revenue
Corporate tax 0.1 0.3 0.4 0.5 1.4 1.9 15.4 24.1 27.2 43.70%
Royalty 0.4 0.8 1.0 2.7 4.5 5.0 84.6 75.9 72.8
Others 0.0 0.0 0.0 0 0 0 0 0 0
Total 0.5 1.1 1.4 3.2 5.9 6.9 100 100 100
Venezuela Total tax 11.5 15.1 13.7 53.4 54.6 54.6 (:) (:) (:) 15.3%
revenue
Corporate tax 2.1 3.5 1.4 9.5 12.7 5.7 19.8 25.1 14.5 21.40%
Royalty 5.6 9.5 3.3 25.6 34.8 13.2 53.2 68.8 33.6
Others 2.8 0.8 5.1 13.0 3.0 20.4 27.0 6.0 51.9
Total 10.5 13.8 9.9 48.2 50.6 39.3 100 100 100
Countries Total tax 13.2 15.6 17.5 65.0 63.3 66.2 (:) (:) (:) 14.1%
average revenue
Corporate tax 0.4 0.9 0.6 2.0 3.1 2.2 10.6 14.6 13.2 33.48%
Royalty 1.6 2.4 1.5 6.9 8.8 5.4 47.3 37.0 29.1
Others 2.0 3.5 5.1 10.8 15.8 18.9 42.2 48.4 57.7
Total 4.0 6.8 7.2 19.7 27.8 26.6 100.0 100.0 100.0
Source: Author’s elaboration based on Gómez Sabaini et al. (2015), using official information of countries and data from Economic Commission for Latin America and the
Caribbean (ECLAC)
Another important indicator is related to the relative importance of tax

revenues from the exploitation of hydrocarbons in state funding. In this
regard, an increased vulnerability of economies on the sector was observed
during the last decade because of the reliance of general government rev-
enues on tax (especially income tax) and non-tax (through royalties and
others) revenues derived from the use and exploitation of oil and gas
resources. Thus, in the last period, from 2010 to 2014, the sector contrib-
uted 30% or more of the total revenues needed to finance public spending
in countries such as Bolivia, Ecuador, Mexico and Venezuela. Except for
the latter case (where the share is close to 39.3% and a considerable
decrease of approximately nine percentage points observed, albeit from
very high values), this also shows a clear and significant growth of the
specific weight of these tax resources with respect to the 2000–2003 val-
ues (see Table 5.1).
The problem mentioned in the previous paragraphs seems to worsen if
one considers the volatility of hydrocarbon revenues, proxied by the coef-
ficient of variation. Although the values of this indicator differ consider-
ably among the countries, the revenues from these activities seem to be
very volatile. Most of the countries exhibit values near or over 40%.
Comparing these values with those for the volatility of total fiscal reve-
nues, the greater volatility underlying NRR revenues can be seen. All these
countries show higher values of volatility in NRR revenues than volatility
in total fiscal revenues.
If one considers the heavy dependence on these resources, and that vola-
tility of revenues is related heavily to the tax base of the countries, it seems
evident that countries are particularly vulnerable to the unpredictable flow
of commodity prices. Volatility that is not managed adequately can result in
a poor economic performance (IMF, 2015). From the state funding point
of view, this imposes a challenge to seek a greater diversification of income
sources to avoid the so-called “fiscal slack”. Adding to volatility issues, the
fiscal slack argument states that the availability of tax revenues from natural
resources reduces incentives to raise general taxes in the rest of the econ-
omy, and that governments with these characteristics show a lack of trans-
parency, accountability and efficiency. Moreover, fiscal dependence on
NRR sectors increases fiscal risks since these revenues are volatile and sub-
ject to a process of exhaustion. Therefore, policy-makers must plan pro-
spectively to replace these resources with other sources as they decay.
In short, through the observation of all data, at least in the hydrocar-
bon sector, there does not appear to be a clear pattern relating the type of
instrument used and the fiscal performance in terms of resources obtained.

In fact, the three countries with the highest tax burden and a greater fiscal
dependence on these resources (Bolivia, Ecuador and Venezuela) have
very different tax regimes, although all of them certainly show the prepon-
derant role of state enterprise in the production of hydrocarbons.
4.2 Minerals
Similar to the hydrocarbon sector, the tax regimes applied to the mining
sector can be analyzed descriptively considering the amount and represen-
tativeness of tax revenues obtained by producer countries in Latin
America.22 In addition, for the purposes of this chapter, it is useful and
illustrative to proceed in comparative terms, attempting to identify the
major similarities and/or differences relative to the hydrocarbon sector of
these countries. Thus, the same periods discussed in the previous section
are taken as a reference.
First, in regard to the composition of the taxes applied to mining activ-
ity in Latin America, in stark contrast to what happens in the hydrocarbon
sector, the diversity of the instruments is much more limited. Shown in
Table 5.2, the corporative income tax is the dominant fiscal instrument.
The common practice observed at the regional level, especially in the min-
ing sector, makes royalties emerge as a mechanism to marginally increase
the effective rate of the corporate income tax paid by mining companies.
In a way, countries have resorted to introduce such royalties as a way to
ensure that the mining sector makes a relatively higher fiscal contribution
than companies in other economic sectors. This is often justified by the
fact that it constitutes an exploitation of a non-renewable natural resource
that is owned by the state. In that sense, fixed royalties make it possible to
ensure minimum revenue for public funding with the advantage of admin-
istration simplicity. In their modern version, when a fixed minimum pay-
ment is established but its actual determination is subject to the
performance or operating margins of private enterprises, these advantages
are maintained and it also endows companies with greater flexibility to
face changes in the financial equation of projects.
Following the calculations of the World Bank (World Development
Indicators), the potential of the mining sector rents has increased strongly
since 2003, especially in countries with greater mining traditions and a
significant share of this sector in the economy. This was evident in cases
like Chile, where although mining sector rents decreased to 16% of GDP
Table 5.2 Latin America (selected countries): Structure and relative indicators of fiscal revenues generated by the production of
minerals
Countries Source In proportion to GDP (%) In proportion to fiscal revenue (%) % of mining revenue Coefficient
of variation
2000–2003 2005–2008 2010–2014 2000–2003 2005–2008 2010–2014 2000–2003 2005–2008 2010–2014 2000–2014
Bolivia Total tax 15.4 18.5 20.6 63.4 57.7 59.4 (:) (:) (:) 12.6%
revenue
Corporate tax 0.0 0.2 0.4 0.0 0.6 1.2 11.8 32.2 42.8 65.70%
Royalty 0.1 0.5 0.6 0.4 1.4 1.6 88.2 67.8 57.2
Others 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Total 0.1 0.7 1.0 0.4 2.0 2.8 100 100 100
Chile Total tax 20.1 24.2 21.6 100.0 100.0 100.0 (:) (:) (:) 8.9%
revenue
Corporate tax 0.3 5.0 2.6 1.7 20.2 11.9 43.3 72.0 86.5 72.70%
Royalty 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Others 0.5 1.9 0.4 2.3 7.9 1.9 56.7 28.0 13.5
Total 0.8 6.9 3.0 4.0 28.1 13.8 100 100 100
Colombia Total tax 14.3 17.2 22.9 49.3 59.0 80.6 (:) (:) (:) 20.6%
revenue
Corporate tax 0.1 0.3 0.1 0.2 0.8 0.5 37.2 51.2 35.8 50.10%
Royalty 0.1 0.2 0.3 0.3 0.7 0.8 62.8 48.8 64.2
Others 0 0 0 0 0 0 0 0 0
Total 0.2 0.5 0.4 0.5 1.5 1.3 100 100 100
Mexico Total tax 10.0 8.5 9.4 70.3 67.8 58.4 (:) (:) (:) 8.1%
revenue
Corporate tax (:) 0.1 0.2 0.3 0.8 0.9 95.7 94.7 89.3 (:)
Royalty (:) 0 0 0 0 0.1 4.3 5.3 10.7
Others (:) 0 0 0 0 0 0 0 0
Total (:) 0.1 0.2 0.3 0.8 1.0 100 100 100
Peru Total tax 12.8 15.7 16.2 83.9 85.6 85.9 (:) (:) (:) 10.6%
revenue
Corporate tax 0.2 2.0 1.0 1.0 9.9 5.0 100.0 93.4 78.7 76.80%
Royalty 0 0.1 0.1 0 0.7 0.6 0 6.6 10.0
Others 0 0 0.1 0 0 0.7 0 0 11.3
Total 0.2 2.1 1.3 1.0 10.6 6.4 100 100 100
Countries Total tax 14.5 16.8 18.2 73.4 74.0 76.9 (:) (:) (:) 12.2%
Average revenue
Corporate tax 0.2 1.5 0.9 0.7 6.5 3.9 57.6 68.7 66.6 66.33%
Royalty 0.1 0.2 0.2 0.1 0.6 0.6 31.1 25.7 28.4
Others 0.1 0.4 0.1 0.5 1.6 0.5 11.3 5.6 5.0
Total 0.3 2.1 1.2 1.2 8.6 5.1 100.0 100.0 100.0
Source: Author’s elaboration based on Gómez Sabaini et al. (2015), using official information of countries and data from Economic Commission for Latin America and the
Caribbean (ECLAC)
for the period of 2010–2014 it is important to note that they reached

more than 20% of GDP in 2006–2007, and averaged 6.6% in the period
of 2000–2003. Peru is another noteworthy case: the estimated mining
rents increased from an average of 0.4% of GDP in the latter period to a
maximum value of 11.9% of GDP in 2007, remaining around 10% in the
2010–2014 period.
This remarkable increase in the middle of the last decade was accompa-
nied by a significant increase, in absolute terms, of mining sector tax rev-
enues. Indeed, in countries such as Bolivia, Chile and Peru (where mining
revenue increases were comparatively higher) these resources experienced
a superlative growth. With a somewhat slower growth is Colombia, the
only case in which tax revenues from the exploitation of coal are included,
based on their importance.
After the international financial crisis, mining countries showed a sig-
nificant recovery in their fiscal revenue from NRR, comparable to the
dynamics in the hydrocarbon sector during the years 2010 and 2011. Tax
revenue from the mining sector stagnated, however, with a progressive
decline in most countries of the region during the later years (2012, 2013
and 2014). The most extreme case was Chile, where mining tax revenues
fell to an amount equal to 3.9% of GDP in 2014 (having previously
reached 8.2% of GDP in 2007).23
Looking at Table 5.2, it can also be seen that between 2010 and 2014
some countries managed to partially recover and stabilize the amount of
tax contribution from mining as a percentage of total tax income in respect
to the values achieved in the years prior to the global financial crisis. This
was the case for Peru, where this indicator reached 10.6% on average
between 2005 and 2008 (up from 1.0% in 2000–2003) reaching a slightly
lower level (6.4%) in the most recent period. For its part, Chile has shown
a more pronounced trend. While the amount of tax revenue from the min-
ing sector reached a meager average of 4.0% of total government revenue
in 2000–2003, it moved to a remarkable 28.1% during the boom in inter-
national prices and, despite the sharp decline of these resources in absolute
terms, it maintained the degree of fiscal dependence on mining activity at
an average of 13.8% for 2010–2014. The remaining countries analyzed
show a different behavior, but in all cases the tax revenues from the mining
sector do not constitute a significant source of state funding.
The revenue from minerals has been subject to a very high degree of
fluctuation for the period between 2000 and 2014, visible in the outstand-
ingly high values of the coefficient of variation. This problem is made clear
if the volatility of these revenues is compared to that of the total fiscal
revenues. Values of this indicator can, in the worst cases, be nearly eight
times higher than the values for the variation in total fiscal revenues. They
also suggest that mining revenues have a more volatile pattern than hydro-
carbon revenues, which in no case exceeded 50%.
While all countries in the sample experience a high degree of volatility
from this source of funding, Chile and Peru seem particularly critical given
that the coefficient of variation rose to values superior to 70%. Although
there is a very high mean coefficient of variation for mining countries of
66%, Peru and Chile surpass this value, indicating that, on average, their
mining revenue is more volatile.
In the case of Chile whose resources are derived from the highly volatile
copper, the greater stability of total tax revenues (together with the lower
share of resources from non-renewable products over the total) causes a
smaller fluctuation of this variable than the average of the region. The high
volatility of these tax bases is neutralized as the greater level of diversifica-
tion of tax revenue structures and the variability of revenue are largely
determined by the participation of resources from non-renewable prod-
ucts in the total.
As shown in Table 5.2, and in opposition to the hydrocarbon sector,
there is a clear pattern among the selected mining countries, all of which
currently obtain most of their mining revenues through the corporate
income tax (Chile, Ecuador, Mexico and Peru) and/or royalties (such is
the case for Bolivia and Colombia). In fact, this pattern is accentuated over
the course of the analyzed years, since Chile, the bigger producer and
exporter of the region, moved from “others” to corporate income tax as
its main source of revenue due to the introduction of the Specific Tax on
Mining Activity, whose mechanics will be discussed in the next section.
5 Recent Experiences and Reforms

in the Selected Countries
In Latin America, the most direct way of appropriation of commodity

rents and their subsequent transformation in fiscal resources has histori-
cally been by participation in the exploitation, whether through state-
owned enterprises or shareholding (Jiménez & Tromben, 2006). These
companies are often subject to a special tax regime, which may consist of
rent payments or fees (canon), additional taxes for public companies, or
excise taxes on oil production.
Given the magnitude and persistence of the upward price cycle from
2003 onwards, the countries involved in producing and exporting found
sufficient space to introduce substantial reforms in tax regimes applied to
the extractive sectors. As highlighted in ECLAC (2013), between 2005
and 2012 the most important legal reforms to ensure public control of
NRR focused on the hydrocarbon sector. Measures to enhance state con-
trol included the nationalization of the sector through joint ventures in
Venezuela (between 2005 and 2007); the nationalization of hydrocarbons
and the re-nationalization of the Huanuni tin mine in Bolivia (2006); the
nationalization of Colquiri mine in Oruro, Bolivia (2012); and the rene-
gotiation of oil contracts in Ecuador (2010). In the latter, production-
sharing contracts were changed to service contracts where the state owns
all crude oil extracted on the condition that the government would cap-
ture 100% of possible increases in oil prices.
Additionally, other governments strengthened state ownership mecha-
nisms such as royalties, usually based on production, and specific taxes.
This has been especially important in the mining sector, where fundrais-
ing by state participation in enterprises has been relatively rare. Royalties
and taxes have ensured a minimum payment for resources to national and
subnational governments as a growing number of countries introduced
reforms in the systems applicable to royalties—these include Bolivia
(2005), Ecuador (2010), Colombia (2011) and Peru (2011).
Furthermore, in Ecuador the reform of the Hydrocarbons Law estab-
lished the “margin of sovereignty” designed to guarantee a minimum
revenue for the state against possible price decreases by an amount of 25%
of the gross production value.
In some of these cases, not only the levels of taxation have been altered
but also scales of varying aliquots were established according to easily veri-
fiable criteria, such as the level of production, location and depth of the
wells, the type of resource extracted, or other variables related to the cost
structure. For example, in Peru, since the amendment of the Mining
Royalties Law in September 2011, this instrument is no longer based on
sales (in force since 2004) but on the operating margin where a scale of
marginal tax rates applies progressively ranging from 1% to 7.14% (with a
maximum effective rate of 12%), depending on the company’s operating
margin. Traditional income taxes, but with multiple rates and other special
charges, have been applied, often with progressive rates on public or private
companies engaged in NRR exploitation. This has been reinforced with the
introduction of new collection instruments between 2005 and 2012.
In highlighting the most salient cases, Bolivia introduced the Direct

Tax on Hydrocarbons in 2005 which, in addition to royalties and shares
on the Treasury, led to a 50% direct participation of the state in extractive
revenues. Meanwhile, in 2006 Chile introduced the Specific Tax on
Mining Activity, which was applied over a type of net income that included
the financial costs of capital equipment depreciation and interests. This
aimed to strengthen taxation on mining (complementing the corporate
tax and the additional tax on remittance of profits abroad) while aiming to
not discourage private investment. For its part, Peru introduced two new
instruments in late 2011—the Special Mining Tax and the Special Mining
Lien—wherein the payment of both is deductible as an expense for income
tax calculation purposes, with fees according to a progressive scale depend-
ing on the operative margin.24
Moreover, given the high volatility of international prices of NRR,
countries like Bolivia,25 Colombia, Ecuador and Venezuela have also con-
sidered the implementation of taxes, duties, participation or contributions
linked to prices or extraordinary profits. Although there is a wide hetero-
geneity in this area, all countries that introduced this type of fiscal instru-
ment did so in the price boom period (2003–2008), clearly as a reaction
to the formidable increase in profits associated with hydrocarbon and min-
eral sectors.
As noted by Acquatella et al. (2013), the advances in tax progressivity
have been clearer and more concrete in the oil sector than in the mining
sector in Latin America. For example, in the oil sector, production service
contracts and risk service contracts are very common. They contemplate
an increasing scale of state participation in profits as the project reaches
increasing rates of return. In contrast, the incorporation of this type of
concept in the tax treatment of the mining sector in the region remains in
its infancy. Mining countries, as shown in Table 5.2, rely heavily on royal-
ties and corporate income tax for revenue generation, with the exception
of Chile to some extent.
6 Fiscal Consequences of This Mode

of International Insertion
Generally speaking, NRR revenue declined sharply in 2015 (measured as

a share of GDP) as a result of the continued weakness in international
commodity prices (OECD/ECLAC/CIAT/IDB, 2016). One of the key
findings in that report, and because of falling oil and mineral prices, is that
hydrocarbon revenues fell on average from 6.8% of GDP in 2014 to 4.4%

of GDP in 2015, representing their lowest level since the report began in
2000. In the mineral sector, revenues fell from 0.53% of GDP in 2014 to
0.37% of GDP in 2015, somewhat buffered by increases of the production
in some countries and with currency depreciations that served to stabilize
non-tax revenues. Thus, the downward trend that began in 2011 for most
producers continues and poses challenges to the sustainability of the tax
regimes in the region.
Unpredictability and volatility of their prices may complicate fiscal policy,
making determination of the appropriate and sustainable level of public
expenditure a difficult process. This mode of international economic inser-
tion, which relies heavily on the exploitation of NRR and the revenue gener-
ated by these volatile sources, has some negative consequences for fiscal
policy in the region. First, at a general level, the heavy reliance on this tax
base manifests in low revenues from corporate income tax or value added
from sources different than NRR. This can be seen in the analyzed countries
where the revenue from oil and mining resources can represent a large share
of total fiscal revenue, as in Bolivia with 33%, Ecuador with 38.2%, Mexico
with nearly 34%, and Venezuela with 39.3%. This argument is made by
Sinnott, Nash, and De la Torre (2010), who point out that reliance on natu-
ral resources may dampen other revenue-generation efforts, exacerbating
the concentration and volatility of fiscal revenue. This is a dynamic consis-
tent with the behavior of low-growth, resource-rich countries. The authors
also mention that taxing mineral resources makes life easier for politicians
because they can obtain resources without having to tax most residents and
firms. Because the ready availability of commodity-based fiscal income can
raise the political cost of collecting traditional taxes, politicians may opt to
reduce traditional tax rates as a way of distributing rents.
Thus, a high dependence on commodities can constitute a self-
reinforcing equilibrium. During recent years, the growth in the tax bur-
den of the countries in the region was driven mostly by the exploitation of
primary goods rather than other sources. The rise in revenues was caused
by the corporate income tax and value-added tax (VAT), the first mostly
carried by the commodity price boom (González & Jiménez, 2015). This
also limits, in an indirect way, the redistributive potential of fiscal policy
given the heavy reliance on rents from NRR and the minor attempts to
strengthen taxes that are not vulnerable to the price cycle, such as the
personal income tax or the equity tax whose redistributive impact is
greater.26
According to the IMF (2015) fiscal policy-makers in resource-rich

countries have often tried to meet two challenging, and at times c onflicting,
objectives. One is to reduce the dependence of public expenditures on
unpredictable fluctuations in commodity prices to avoid overheating the
economy during price upswings, or making large expenditure cuts during
downswings. The other is to leverage resource revenue to support long-
term growth, including by scaling-up public investment. Here the regional
experience showed numerous episodes where the fiscal adjustment took
the form of a public investment repression. Traditional policies to cope
with the ups and downs of the economic cycle have tended to punish
investment, both in the expansion phase and in the contractive phase of
the cycle. In the former, economic policies have been unable to sustain the
expansion of investment; while in the latter, public investment has been
used as an adjustment variable with short-term criteria throughout the
deactivation of tax deduction and tax incentive programs for capital for-
mation in determined sectors. This reduces both investment and the abil-
ity to undertake new investment projects (Clements, Faircloth, &
Verhoeven, 2007; ECLAC, 2015; Fanelli, 2013).
Evidence has shown that resource-rich countries tend to have procycli-
cal fiscal policies and this has been the case for Latin American countries,
most of the time. One of the problems that social spending in the region
faced a few years ago, as noted in ECLAC (2010), was its highly procycli-
cal character. This explains the high impact of crises and low growth for
the poor and vulnerable, as they have less capacity to absorb negative
shocks that are aggravated by the lack of public resources to alleviate these
shortcomings.27
Only in the last few years have Latin American countries begun to push
countercyclical approaches to social spending, recognizing the role of pos-
itive employment dynamics and household incomes to reduce gaps and
consolidate well-being. This behavior was accentuated by the financial cri-
sis that originated in the subprime mortgage market of the United States
and aggravated by the fall of Lehman Brothers and other entities linked to
international financial activity (Jiménez & Kacef, 2011).28
Some evidence supports the recent tendency to a more countercyclical
fiscal policy. Klemm (2014), in carrying out econometric estimations,
shows that while fiscal policy tended to be procyclical in Latin America, on
average, country-specific estimations cannot rule out countercyclical fiscal
policies for most of the countries and within the analyzed countries,
Colombia and Mexico also seem to be moving toward this trend.
7 Final Remarks

Latin American economies have been subject to a significant degree of
macroeconomic volatility throughout their history, and this is associated
with various elements such as international economic insertion, production
structure, economic policy, natural disaster vulnerability, institutional
arrangements, among others, with a vast array of impacts over different
economic dimensions. In particular, the chronic shortage of foreign
exchange throughout the region is linked to an international mode of eco-
nomic insertion that is heavily specialized in the production of raw materi-
als whose international prices have shown high volatility in the short term.
In the previous decade, Latin America experienced a stage in its eco-
nomic history that has been driven, in part, by the upswing in commodity
prices. This fact is manifested in sustained processes of high economic
growth, improvements in social indicators such as poverty and income
inequality, and a remarkable stability of the political order. These improve-
ments were achieved to some extent by the adequate measures taken by
policy-makers throughout the region who sought to take advantage of the
promising external context of high commodity prices. Among the sample
countries, an important fact behind these improvements was an enhanced
fiscal position attained through various tax reforms.
Latin American countries implemented a wide array of reforms follow-
ing different approaches with heterogeneous outcomes. Measures included
an amplification of state ownership through nationalizations in the hydro-
carbon sector, as in the case of Venezuela and Bolivia, or renegotiation of
contracts in Ecuador. In addition, existing instruments were strengthened
or new ones introduced such as royalties, income tax and specific taxes in
Bolivia, Ecuador, Colombia Peru and Chile; or the implementation of
taxes, duties, participations or contributions linked to prices or extraordi-
nary profits in several countries.
A context of declining oil and mineral prices poses major challenges to
the Latin American economies that are producers/exporters of these
products. A heterogeneous impact among them can be expected, albeit
with a greater magnitude in some countries, caused by specific character-
istics such as the share of the NRR in their export structure or the fiscal
instruments applied to them. At a general level, the bonanza cycle led to a
partial reversion of the process of diversification that allowed increased
manufacturing exports and further increased the share of primary goods
and NRR-intensive products in its export structure. This tendency can be
detrimental to economic growth in the future since diversification can be

associated with portfolio effects, which bring less volatility in exports and
allows countries with underdeveloped financial markets to smooth con-
sumption in the face of large fluctuations in exports and output.
To address the challenges that the actual international scenario poses
over the countries analyzed in this chapter—and other heavily specialized
Latin American countries—it is not enough to just consider the fiscal
impacts on aggregate, as usually reported in the literature on the subject.
As it is argued in the introduction of this book, the interdependence of
Latin American economies within the global economy at this moment of
uncertainty is very evident. According to that approach, this reality calls for
a special emphasis on transnational factors to properly explain tax regime
dynamics, understudied in contemporary tax system research in the region.
In considering falling commodity prices and the gradually diminish-
ment of international demand, policy-makers should also embrace the dif-
ferent mixes of fiscal impacts that have been and will continue to be
heterogeneous between all seven countries analyzed. Lower prices for
commodities would mean that these countries need to make the necessary
efforts to keep their spending budgets in direct relation to potential
decreases in fiscal revenues by diversifying sources of revenue, and avoid-
ing excessive dependence on exports of NRR through the strengthening
of other less-volatile tax bases such as property taxes or personal income
tax. Other bases such as VAT—with the exception of Mexico—are more
developed throughout the analyzed countries and direct taxes show
greater margins and are more progressive in distributional terms.29
Although the impact will differ within the countries it is crucial that they
keep their instruments and tax regimes under review and gradually improve
them to maximize value and minimize the state’s balance of tax collection
from extractive sectors.
In many ways this is a difficult process and must be conducted with
care since, as has been emphasized, there are multiple trade-offs between
the different evaluation criteria of fiscal instruments, requiring some bal-
ance between the different objectives. This means, for example, maintain-
ing reasonable investment dynamism and concurrently achieving a
progressive state participation in economic rents derived from natural
resource extraction, achieving an adequate sharing of risk between the
government and investors, and assuring compliance with a reasonably
low administrative cost.
Although there have been some advances, with some of the analyzed
countries moving toward this direction in recent years, one of the key pil-
lars to build this policy space continues to be the creation of countercycli-
cal fiscal capacities or sustainable fiscal positions over time. This allows,
when necessary, programs aimed at counteracting the social effects of the
periods of downturns, such as unemployment and the exacerbation of
poverty. Increasingly, the demands for more-efficient and transparent
public action have become a central issue, simultaneously making possible
greater citizen participation. This would contribute to the legitimacy of
public policies and the necessary taxes to provide them with long-lived
support and ultimately improve democratic governance.
Notes
1. For more information see Ffrench-Davis (2010).
2. For more information see Gómez-Sabaini et al. (2015) and Acquatella,
Altomonte, Arroyo, and Lardé (2013).
3. For more information see Rossignolo (2015).
4. For more information see OECDE/ECLAC/CIAT/IDB (2016) or
Gómez-Sabaini et al. (2015).
5. In the sense of adding more uncorrelated products in the country export
basket. Hesse (2008) provides more information on this analogy.
6. The one that cannot compete internationally with appreciated exchange rates.
7. For more information see Tornell and Lane (1999).
8. Extractive institutions emerged when Europeans pursued a strategy of
extracting resources from the colonies without settling and without devel-
oping participatory institutions (Acemoglu et al., 2003).
9. In a volatile economic environment, a larger volatility of consumption than
GDP is often observed, although the capacity to stabilize the trajectory of
consumption has been improved recently throughout the region.
10. The biggest share goes to Chile with the 31% of the total world
production.
11. To illustrate this point, most of Colombia’s oil production is located in two
departments. In Bolivia, the department of Tarija produces 60% of total
national gas. In Peru, production of oil is hugely concentrated in a couple
of provinces, meanwhile in Chile more than 53% of copper production is
in the Antofagasta region.
12. In turn, when not administered appropriately, these resources tend to
exacerbate other imbalances between jurisdictions of the same country,
which relieves the importance of the allocation of tax powers and spending
responsibilities in countries with a high degree of fiscal decentralization.
The same can be stressed in relation to the distribution of revenue from

NRR between different levels of government in more centralized coun-
tries. The aforementioned rise in tax revenues has led to a review of the
systems of financing and redistribution between levels of government seek-
ing to avoid a growth of already existing territorial gaps and the tensions
between jurisdictions. In addition, this leads to concentration of property
and little employment generation due to high relative capital intensity.
13. Progressivity can be defined as the extent to which the “government take”
increases as a project’s profitability rises, meaning that a tax regime will
yield a rising present value of government revenue as the pre-tax rate of
return on a project increases.
14. A detailed analysis of the design of these specific instruments can be found
in Tordo (2007) and Boadway and Keen (2010).
15. Of course, countries can, and often are far from this premise. The level of
proximity is based on their ideology and political orientation. Robustness
is a sign of stability and balance of interests and objectives, but there may
be another criterion, especially from the official technicians who design or
reform them.
16. There are also, of course, examples of how the legal framework (and stabil-
ity clauses) sometimes preclude these practices from governments even
when desirable (Chile and Peru cases). If a Bilateral Investment Treaty
(BIT) exists then the possibilities of contractual opportunism are reduced,
but this does not seem to be the case, at least during the last decade.
17. For more information see Gómez Sabaíni et al. (2015).
18. Governments can and do have serious problems in determining the vol-
umes (source of evasion), although over recent years the control has
improved. What is to be expressed is that it is observable (even with diffi-
culties), unlike the utilities that are more difficult to determine by the
sophisticated tax planning operations that these companies usually imple-
ment to transfer benefits between countries and lower their global tax bur-
den, taking advantage of loopholes in tax systems.
19. However, it cannot be denied that in some countries in the region, taxes
on the commercialization of fuel and other hydrocarbon derivatives can be
very important. Not only the specific tax on their consumption, but also
VAT and import duty levied on these sectors can generate, in some cases,
considerable amounts of tax revenue.
20. While an attempt to cover as many years as possible is made, it was decided
to delete the year 2009 from the selected periods to avoid distortions aris-
ing from the drastic effects of the economic crisis of 2008–2009.
21. While royalties received for the right to extract oil or gas (also from the
exploitation of other mineral resources) are normally regarded as non-tax
revenue, in some cases the application of criteria to distinguish a tax can be
particularly problematic. The most emblematic case is that of rights for

hydrocarbon production in Mexico, where there is no consensus about its
classification as a tribute.
22. Regarding mining, the analyzed countries are Bolivia, Chile, Colombia,
Mexico and Peru. The selection of these is related to the current economic
importance of this sector in these countries (as a proportion of exports, its
contribution to GDP or state funding).
23. The U.S. Government estimates a further decline of 0.5 percentage points
of GDP by 2015 (OECD/ECLAC/CIAT/IDB, 2016).
24. The fundamental difference between the two is that the Special Mining
Tax (“Impuesto Especial a la Minería”) applies exclusively for mining com-
panies that do not enjoy of tax stability agreements, while the Special
Mining Lien (“Gravamen Especial a la Minería”) levies specifically the min-
ing activity subscribed through state agreements in projects with contract
guarantees and investment promotion measures under the General Mining
Law. The differences in the applicable rates (higher in the second case) are
applied to make the tax burden relatively equivalent for all mining
companies.
25. The additional 25% tax on extraordinary profits was repealed by the
Hydrocarbons Law No. 3058 (2005) and replaced by a participation of the
state company (Yacimientos Petrolíferos Fiscales Bolivianos) in the new
operating contracts.
26. In fact, Amarante and Jiménez (2015) show that fiscal policy among the
selected countries has a limited redistributive impact. All of them have a
highly unequal distribution of income measured by the Gini coefficient,
except from Venezuela where a lower value of it is obtained at the cost of
accumulating high fiscal deficits.
27. According to Céspedes and Velasco (2011), the problem of procyclicality
seems to be especially acute for commodity-rich nations. Commodity-
linked revenues (taxes, royalties, and profits) can be a large portion of
government revenue, which is the case for most of the analyzed countries.
If expenditures react more than proportionally to revenue increases, then
the fiscal balance can move with the cycle.
28. In this regard, the Latin American country that made the most significant
advance is Chile with the establishment of the structural fiscal balance rule
that, according to Frankel (2010), gives government the ability to run a
deficit larger than the target to the extent that output falls short of its long-
run trend in a recession, or the price of copper is below its medium-term
equilibrium.
29. For more information see Amarante and Jiménez (2015).
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PART III
Relational Dimension of Taxation

CHAPTER 6
Gender Bias of Regressive Taxation in Latin

America: Overview and Exploration
of the Argentinean Case
Corina Rodríguez Enríquez and Nicolás Águila
1 Introduction
Latin America continues to be considered as the most unequal region
in the world. According to data from ECLAC, the average Gini index for
the region in the year 2014 was 0.491, with an extreme value of 0.564 in
Honduras and the lowest value of 0.379 in Uruguay. Gender gaps are
an integral part of these socioeconomic inequalities. In fact, and just to
mention a few indicators, according to UN Women (2017) women: (a)
have fewer activity rates (56.4% for women while 84.7% for men in
2014); (b) comprise a higher proportion of individuals without income
of their own (28.9% compared to 12.5% among males in 2014); (c) have
a higher poverty index (the femininity index in poor households1 reached
118.2 in 2014).
C. Rodríguez Enríquez (*)

CONICET & Centro Interdisciplinario para el Estudio de Políticas
Públicas (Ciepp), Buenos Aires, Argentina
N. Águila
Centro Interdisciplinario para el Estudio de Políticas Públicas (Ciepp)
Buenos Aires, Argentina

DOI 10.1007/978-3-319-60119-9_6
162 C. RODRÍGUEZ ENRÍQUEZ AND N. ÁGUILA
Fiscal policy is a key element for transforming the inequality and also
the dynamics that reproduce it. In the last few decades, under the new
wave of governments that revitalized the role of the state in the economy,
many countries in the region have enacted redistributive spending poli-
cies, particularly regarding income transfers.2 This, in addition to improve-
ments in the levels of economic activity and in indicators of the labor
market, has resulted in a reduction of poverty and a less significant reduc-
tion of inequality.
These policies were financed mainly by a growing fiscal income resulting
from higher levels of economic activity, an improvement in the levels of
employment and wages, and a rise in the price of the main export com-
modities (of primary origin). That is, by an increase in the tax collection
from those sources. However, no advance has been made in passing tax
reforms which would secure a greater stability of high levels of tax collec-
tion and, simultaneously, greater progressivity of the tax system.3
In fact, Latin American tax systems, albeit having enormous heteroge-
neity, continue to be characterized by a low level of average tax revenue
(15.3%)4 and a tax structure with greater weight of indirect taxes; low
participation, although this is improving; taxes on income; weak taxation
of wealth; and high levels of tax evasion and avoidance.
Due to these characteristics, tax systems in the region do not contribute
to reducing inequality and instead perform as a factor of its reproduction
and intensification. As mentioned, this socioeconomic inequality in Latin
America also has a specific gender aspect, and this is implicit in the fiscal
contract that reveals the relational dimension of taxation (see Atria, Groll
& Valdés in this volume). As will be shown more precisely in the next sec-
tion, tax policy, like any economic policy, acts in a field characterized by
gender relations and thus can either take advantage of them or contribute
to transforming them. Taxation affects the daily lives of men and women,
and may have implications for their behavior (for their consumption, their
decisions to offer or not their work force in the labor market, for the
intensity of unpaid work they do, etc.). In short, taxation has the potential
to affect this dimension of inequality.
The objective of this chapter is to discuss the theoretical and empirical
contributions on gender aspects in taxation in Latin America, and sec-
ondly, to evaluate a specific country case (Argentina) regarding whether its
recent tax reforms contribute to reducing gender tax gaps.
With this goal in mind, in the next section we summarize the concep-
tual elements which allow recognition of the gender aspects of taxation.
GENDER BIAS OF REGRESSIVE TAXATION IN LATIN AMERICA... 163
This is followed by a review of the main findings of the emergent empirical

contributions. Finally, the specific case of Argentina is analyzed. Based on
secondary quantitative information, the extent by which some tax reforms
improve equality is evaluated, but also aspects that still form part of the
pending agenda of tax reforms in the region are discussed.
2 Gender Aspects of Taxation:

Conceptual Considerations
Feminist economics has been making substantial conceptual contributions
to the study of gender dimensions in macroeconomics.5 The fundamental
argument is that there is an interrelationship between economic and
gender relations.6 When operating in a gendered field (i.e., a field deter-
mined by gender relations), macroeconomic policies produce differenti-
ated impacts on men and women who play different roles as workers,
consumers, social transfers beneficiaries and owners (or not) of economic
assets. In addition, macroeconomic dynamics are based on gendered eco-
nomic relations.7 For the same reason, macroeconomic policies can per-
petuate or reinforce economic gender gaps, or can help to tackle or
diminish them.8
As we have discussed in previous works (Oxfam, forthcoming), fiscal
policy, both on its expenditure and revenue sides, like any other economic
policy, is not gender-neutral. However, it can be gender-blind, failing to
recognize the interrelations between economic dynamics, policies, and
gender relations.
Gender analyses of public budgets illustrate the consequences that
spending policies can have on the lives of men and women, and on gender
gaps. For example: if a government decides to cut its spending in areas
such as health, education, infrastructure or basic services, this increases the
intensity of care activities within the households where, given the sexual
division of labor, an additional burden in the form of time dedicated to
unpaid care work will be carried by women. Conversely, if a government
invests in public transport it is possible that this would reduce the time
that women spend moving between their multiple paid and unpaid work
activities, releasing pressure on their time dedicated to work. Thus, even
public expenditure policies presumed to be gender-neutral or unrelated to
gender equality have a specific and different impact on men and women.
Tax policy, the counterpart of expenditure policy, should also be

analyzed from this point of view. The study of taxation from a gender
equality perspective aims to observe if and how tax systems reinforce or
challenge the structures that reproduce gender inequality and are thus
part of the relational dimension of taxation. Such an aim includes a com-
bination of objectives.9 Firstly, it requires us to observe whether there are
explicit or implicit gender discriminations in the composition of tax sys-
tems (which in turn reveals the underlying forces in the decision-making
processes that shape tax systems). Secondly, it estimates whether the tax
burden is distributed in a way that relatively discriminates (or benefits)
population groups relevant to a gender equality perspective. Groups in
this category include, for example, single-parent households, in their
majority led by women; or poor households, which are mainly headed by
women; or households with double-income, where both women and men
take part in the labor market and exhibit a distribution of resources within
the households that is presumed to be more equal. Finally, it evaluates
whether tax policies strengthen, alter or do not affect the existing situation
of gender inequality (for example, women and men’s participation in the
labor market, the performance in economic sectors that generate employ-
ment for men and women, etc.).
Thus, there are at least three areas of tax policy and structure relevant
for a gender-sensitive analysis: (a) the prevailing discrimination in the tax
legislation and/or in the relation between the form of implementation of
the taxes and the prevailing gender relations; (b) the relative incidence of
the tax burden; (c) the impact of taxes on individual behavior (for exam-
ple, in decisions over the amount of labor individuals wish to supply, or in
decisions regarding the consumption of certain types of goods).
Identifying gender biases is one way to make the gender impacts of
tax systems explicit. Such biases can be explicit or implicit. A tax system
is considered to have an explicit gender bias when specific regulations in
the tax legislation identify and treat men and women differently. For
example, in the Moroccan tax system, men can directly make use of
deductions for their spouses and dependent children. Women, however,
have to explicitly prove economic dependence to make use of the tax
deduction (El Bouazzaoui et al., 2010).10
Tax systems can also contain an implicit gender bias. This is the case
when regulations established in the tax legislation have, due to social
arrangements and prevailing economic behavior, different implications for
men and women. For example, when there is a joint assessment of personal
income of married couples, women’s income (which is usually the secondary

income of the household) is often punished with a higher tax rate than that
corresponding to an individual’s taxation. When income tax discriminates
by source, bias can occur if the various sources (for example, income from
wage employment vs. income from self-employment) are treated differ-
ently in the tax legislation. In most countries in the region, women are
overrepresented in self-employment. If the income sourced in these activi-
ties presents a tax penalty compared, for example, to wage employment,
then the legislation has an implicit gender bias given that women face rela-
tively higher rates due to their form of labor market insertion. When there
are different consumption structures by sex, there could be biases associ-
ated with differential tax rates on more feminized consumptions.11
Elson (2006) points out that the conclusions about the “bias” in a tax
system should be related to men and women’s capacity to pay, as well as to
their contribution to the economy, not only through paid work but also
through unpaid domestic and care work. According to some contribu-
tions, the unequal distribution of care duties that puts obstacles in wom-
en’s economic participation could be interpreted as a specific tax penalizing
women (De Villota, 2003).
Taxation also has implications, perhaps more indirectly, on gender gaps
when affecting production, and hence, the generation of jobs in certain
activity sectors to the detriment of others. Due to the horizontal segrega-
tion in the labor market, men and women are concentrated in different
types of activities. Thus, the way in which taxation benefits or penalizes
those sectors could affect gender gaps in employment. For example, since
women are overrepresented in employment in the textile sector, a reduc-
tion in import tariffs on textile products can have a negative impact on
women’s employment.
Finally, taxation can indirectly affect gender gaps through consump-
tion, when consumptions considered more feminine or masculine are
taxed differently.12 For instance, if alcoholic drinks or gambling games
were more masculine consumptions, an excise tax on them could affect
men relatively more. This could cause, in the best-case scenario, a reduc-
tion in the consumption of those goods (which could be considered
“harmful”). However, it is also possible that the process of intra-household
bargaining, and the power relations that sustain it, implies that men appro-
priate a larger portion of the household’s income to maintain their con-
sumption of those goods whose prices have been increased by taxes, to the
detriment of basic consumptions associated with women and children.
In sum, looking at taxation from a gender equality perspective involves

revealing explicit and implicit gender biases; evaluating the relative weight
of tax incidence; studying taxation impacts on employment, consumption,
and people’s behavior; and ultimately, noticing whether taxation is either
contributing to dismantling the structural roots of economic gender
inequality or helping to perpetuate them.
3 Lessons From Empirical Studies in the Region

The study of gender dimensions in taxation in Latin America is still in its
embryonic stage.13 The value of this approach is that it involves both a
theoretical discussion about what it means to analyze taxation from this
perspective, as well as a reflection on the best methodological strategies to
do so, and even empirical evidence that allows us to identify some initial
relevant findings, which we will summarize in this section.
Grown and Valodia (2010) carried out an international project that
included the cases of Argentina and Mexico. In their study they empiri-
cally addressed two dimensions, the first of which were gender biases in
the personal income tax, through the study of the tax legislation, and the
elaboration of theoretical examples of characteristics and the relative
weight of this tax. The second dimension involved quantitative estimation
exercises on the tax burden of three sets of indirect taxes: general taxes on
consumption (value-added tax, VAT), fuel tax, and excise taxes (tobacco,
alcoholic drinks, etc.). The inquiry into personal income taxes showed
that there is almost no explicit gender bias in the tax legislation of these
countries,14 but there are implicit biases. This situation is common to most
countries analyzed in the international study (Ghana, South Africa,
Uganda and United Kingdom). The exceptions were Morocco, which
showed the abovementioned explicit bias by treating men and women dif-
ferently regarding their dependents, and India, where a positive bias was
found, since the tax threshold is higher for women.
In both Argentina and Mexico there are no implicit biases resulting
from the joint assessment, since in all cases the tax declaration of the mem-
bers of a conjugal unit is individual. However, there are biases resulting
from the interpretation of the norms (for example, regarding how family
allowances can be imputed, if only to one spouse or both, each one in his/
her own individual statement), with discriminations mainly derived from
differential treatment by sources of income. This issue will be further dis-
cussed in the following section regarding the Argentinean case. Similar
conclusions were reached in the cases studied by Pazos Morán and

Rodríguez (2010) for Guatemala, Ecuador and Chile that were also con-
ducted through the analysis of the tax legislation.
The second element of Grown and Valodia’s (2010) work was a quan-
titative analysis that aimed to identify gender gaps in the relative weight of
indirect taxes. This required some methodological definitions, particularly
regarding the unit of analysis. To start, we may consider estimating the tax
burden at a personal level, expecting to find a heavier burden for women
than for men as a gender gap.
There are, however, some problems with this assessment that leads to
the question of which is the gender tax justice criterion in indirect taxa-
tion. In the former statement, the implicit justice criterion considers a situ-
ation to be fair when the tax burden is quantitatively similar or equivalent
for women and men. This is one possible criterion. However, we should
cast doubt on whether it is a valid criterion in a context of an economic
system that reproduces women’s economic subordination, and implies
greater difficulties for women to access monetary income. That is, when a
noticeably higher proportion of women, compared to men, lack their own
income;15 when women have to show greater skills than men to earn the
same wage;16 and when, in addition to the paid work that women do in the
labor market, they also carry a substantive burden (that is also much big-
ger than that of men) of unpaid domestic and care work.17 To sum up, is
it fair that the tax burden is similar when the opportunities for income
generation, and even the contribution to the production of value to the
economy, are different?
Furthermore, there is an operational problem for such an inquiry at the
individual level, since the basic sources of information to make this estima-
tion are the household expenditure surveys. This instrument does not
provide information about the distribution of consumption within house-
holds, which makes it impossible to use individuals as a unit of observation
in practice. This leads to a second interesting discussion which is the ques-
tion of what makes a criterion for households classification relevant for a
gender analysis.
Grown and Valodia (2010) decided to use three categories. The first
was the classic concept of the sex of the person considered as head of the
household. This criterion is traditional, but also problematic, since head-
ship is often wrongly taken to represent income provision. Household
conformations can be very diverse and it can be difficult to identify the
right person for that category, and also because most female-headed
households usually turn out to be single-parent households, which could
impose biases in the analysis.
Therefore, Grown and Valodia (2010) decided to use two other classi-
fication categories. The first involved sorting households according to the
sex of the income providers. Hence, they estimated the tax burden for
households with a male provider, households with a female provider, and
households with double providers. Here the assumption is that dual-
provider households would be the most equal ones. The other classifica-
tion category related to the number of adult women and men in the
household. Thus, the tax incidence was estimated for households with a
majority of adult males, with a majority of adult females, and with an equal
number of adult males and females. In all cases, the estimation was disag-
gregated for households with and without children.
The main conclusion of the study for the two Latin American cases was
that gender inequality in taxation is strongly related to socioeconomic
inequality. That is, the reason why the tax burden falls more heavily on
low-income households is the regressivity of the tax systems, and it is the
feminization of poverty that causes this gender bias.
In the Argentinean case, for the year under study (2008) the tax struc-
ture presented, in aggregate, a proportional behavior and a higher relative
incidence of male-type households. However, when disaggregating, the
incidence turned out to be higher for male and dual-provider households.
The proportionality of aggregate tax incidence adopted a more progres-
sive character in the case of those households, while a more regressive (or
less progressive) one in the case of households with a female provider.
When the analysis is disaggregated by consumption kinds, two ele-
ments are identified: (a) that tax incidence becomes more regressive for
certain types of expenses, and (b) that tax incidence relatively increases for
female-provider households (as opposed to the aggregate trend), for cer-
tain types of expenditures. The regressivity pattern expresses itself particu-
larly in food (mainly those items included in the basic basket of goods),
the taxes on households’ services, public transport, and baby products.
For the case of Argentina some tax reforms were simulated, especially
the tax relief on the VAT for some selected basic goods. This could show
how the progressivity of the system could be strengthened and how this
affected mainly the low-income households, among which female-provider
households were overrepresented.
In the Mexican case, the existence of a wide range of basic consumption

goods with a zero tax rate, implies a progressivity pattern that benefits
low-income sectors relatively more. However, the disaggregated study by
household type has shown that, for every level of income, female-provider
households with children are those that face the biggest relative tax bur-
den in indirect taxation.
The international experience is also varied in this respect. The situation
of indirect taxation in the two Latin American cases discussed is similar to
the cases of Morocco and the United Kingdom, where households with
two providers also carry the biggest burden of the VAT. Conversely, the
same type of households carry the biggest burden of fuel taxes in Argentina,
Ghana, Morocco, South Africa and the United Kingdom.
From another methodological point of view, Coello Cremades and
Fernández Cervantes (2014) studied the Bolivian case in the context of a
government that promoted measures to improve the distributive profile of
the economy. Of particular relevance in this process was the introduction
of the direct tax on hydrocarbons in 2005, which managed to capture a
portion of the rent derived from the exploitation of natural resources
(mainly gas). Despite these changes, the tax structure remains to be legis-
lated by the 1994 tax code.
Coello Cremades and Fernández Cervantes (2014) studied the tax sys-
tem and its relation to the structural characteristics of women’s participa-
tion in the economy. Their main conclusion was that the concentration of
the tax system (three taxes explaining 80% of the collection, with the VAT
being the most important) and its regressivity deepened both socioeco-
nomic, as well as gender inequality. In particular, the authors point out the
following elements: (a) regressivity affects women relatively more because
they are overrepresented in the lower income strata; (b) there are no
reduced quotas or exemptions for goods of basic need, consumed rela-
tively more by women; (c) the high proportion of women without their
own income is particularly affected since they cannot compute the VAT
payment as tax credit; (d) the imposition of a flat rate (i.e., a fixed amount
of payment) on direct taxes negatively affects women in relative terms, as
they are overrepresented among the lower income population; (e) the
absence of possibly deducting expenses related to the daily reproduction
of life in personal income tax is more detrimental to women, who to a
greater extent assume the weight of that responsibility through their
unpaid care work; (f) differential treatment of incomes from different
sources has also gender biases, for example, income from self-employment
(where women are overrepresented) has three different taxes, while

incomes sourced from certain financial rents or pensions is not taxed at all;
(g) in the Bolivian case, tax benefits are not used to benefit women par-
ticularly (nor their consumption, or the activity sectors where they are
usually employed, or the type of jobs in which they are represented).
Finally, Oxfam (forthcoming) studied the case of two Central American
countries (Honduras and Guatemala) and one in the Caribbean
(Dominican Republic). The inquiry in these countries is particularly
important since they have serious problems of state financing, the tax bur-
dens are very low and the regressivity levels high, and where it is impera-
tive to advance tax reforms that simultaneously increase collection and
improve distributive justice. Acknowledging the existing gender biases, to
eliminate them and avoid new ones, is a step forward.
This study reached similar conclusions as those of the previous cases. It
revealed that the legislation and the way of applying personal income tax
has practically no explicit gender bias.18 Yet, implicit biases derived from
the differential treatment of incomes from different sources and the over-
representation of women in the relatively less-favored sectors by taxation
(income from self-employment, in the cases of Honduras and Guatemala)
were identified. Regarding indirect taxation, there is also a negative impact
on women due to the regressivity of the tax system, probably moderated
in cases where there are exemptions from some goods of basic consump-
tion (in Honduras and the Dominican Republic). Finally, the study of the
three cases revealed the existence of an extensive systems of exemptions
(for specific activity sectors) that undermine state financing and limit the
capacity to implement equalizing policies, a problem shared by most
countries in the region. The strong power of the economic and political
elites in these countries appears as a structural challenge to be faced in any
attempt to progressively reform the tax structures (ICEFI, 2015, Garita in
this book).
Summarizing, the conceptual, methodological and empirical develop-
ments in the existing studies of the gender dimensions of tax systems in
the region allow us to conclude that the topic is increasingly relevant con-
sidering the need for tax reform. Such reform should widen the available
resources to finance public policies, while also establishing greater pro-
gressivity in the system to help to reduce inequalities. In this sense, it is
important to keep in mind that gender biases in taxation are strongly
interrelated with dimension of socioeconomic inequality in tax systems.
Demands for greater tax justice are very much in force and should be
achieved with progressive reforms and stronger limits to the influence of

political and economic elites in the design and implementation of tax
policies.
4 Changes in Taxation and Advances in Gender

Equality: Preliminary Exploration for
the Case of Argentina
The Argentinean case has been previously exposed as a country where

gender biases in direct taxation and the regressivity of the system (with its
specific gender profile) can be observed. In this section, we evaluate the
extent to which this characteristic has been deepened or reversed in the
last years, and what are possible actions that allow advancement. This
inquiry becomes relevant because Argentina has undergone a profound
process of implementing an economic strategy based on economic liberal-
ization and market regulation in the nineties. This was followed in the first
decade and a half of the twenty-first century by a government that has
relegitimated state intervention in the economy and has tended toward a
stronger regulation, expanded the public expenditure, implemented coun-
tercyclical policies, and consolidated income transfer policies that are more
likely to produce an improvement in equality indexes. Still, a structural tax
reform has not been realized, although partial changes have taken place,
some of which will be evaluated in the next section.
4.1 The Characteristics of the Argentinean Tax System

Argentina is characterized as being one of the countries with the highest
tax burden in the region. Thanks to the sustained growth that it experi-
enced since the last crisis recovery (2003–2015) tax collection has risen
from 24% in 2004 to 32% in 2016, according to the Dirección Nacional de
Investigaciones y Análisis Fiscal del Ministerio de Economía (National
Direction of Research and Fiscal Analysis of the Ministry of Economy).
Several reasons explain this evolution, the first of which is the restatement
of taxes that had been eliminated in the past, such as export taxes and a tax
on bank credits and debits. Second, the activity, wage, and consumption
recovery that took place in the period allowed an important growth on the
two main national tax collection items: the VAT19 and the so-called tax on
profits (tax on incomes, both to corporations and personal income).20
Third, the social security renationalization in 2008 and the creation of the
Sistema Integrado Previsional Argentino (SIPA, Integrated Social Security
Argentinean System), allowed recovery collection from personal social
security contributions (Cetrángolo, Gómez Sabaíni, & Morán, 2015).
The taxation structure is principally based on indirect taxes (on general
consumption, goods and specific services), although their participation
has been diminishing. In fact, according to data from the Dirección
Nacional de Investigaciones y Análisis Fiscal del Ministerio de Economía,
while the sum of indirect taxes reached 61% of the total national collection
(national and provincial governments) in 2004, that participation dropped
to 51.4% in 2016. Therefore, the participation of direct taxes rose.
However, the weight of this increase was not due to the tax on profits,
which was reduced from 19.7% in 2004 to 17.4% in 2016, but thanks to a
relative increase in the social security contributions, which increased their
participation from 11.6% in 2004 to 21.9% in 2016.21
Does this tax structure (and its evolution) favor or reduce gender gaps?
Next, and based on existing studies, we will try to answer this question.
4.2 The Improvement of Distributive Tax Incidence

and its Gender Dimensions
As previously discussed, the existing studies in the region (including
Argentina) show a direct relationship between socioeconomic and gender
inequality. That is, gender gaps are derived from the socioeconomic
inequality due to the overrepresentation of women in economic vulnera-
bility situations. In fact, although the gender income gap has been dimin-
ishing in Argentina, it is still significant. According to information from
the Encuesta Permanente de Hogares (Permanent Household Survey)
made by INDEC (National Institute of Statistics and Census), the gender
wage gap in registered employment is 19%, while in non-registered
employment it rises to 37%. Hence, distributive tax incidence studies can
provide some data regarding how the tax system affects gender economic
inequality in relative terms.
Existing tax incidence studies in Argentina are not strictly comparable
to the studies discussed in the previous section, since they use similar but
unequal methodologies and sources of information. Nevertheless, system-
atizing the conclusions of these studies over time can provide insight to
the extent to which the distributive incidence of the tax systems has been
transformed. Gaggero and Rossignolo (2011) show that the regressivity
Table 6.1 Tax
1997 2006 2010
incidence studies results
in Argentina 1 67 47.4 49.6
2 56 40.7 43.6
3 52.4 38.4 43
4 49.3 38.4 44.3
5 35.9 44.5 46.4
Average 42.4 42.3 45.4
Source: Based on Gaggero and Rossignolo (2011)
of the tax system has decreased and present the last estimation as a propor-
tional tax system, but with greater tax incidence in the extremes (first and
last distribution quintile) (see Table 6.1).
The improvement, especially in the last years, are due to a higher rela-
tive participation of direct and progressive taxes, either because more
people have been included in the payment of personal income tax, or due
to the introduction of new taxes such as export taxes. The latter have a
more progressive impact compared to direct taxes on general consump-
tion, but all have resulted in greater progressivity of the tax structure
(Gaggero & Rossignolo, 2011).Nevertheless, in the context of a system
that is improving and becoming more proportional, it is worth highlight-
ing that the first income quintile remains the one that faces the highest tax
burden in proportion to its income. A gender bias is expected if the
regional tendency toward a higher feminized poverty also exists in
Argentina.
An update of the study of tax incidence by household type (presented
as background in section 3), shows that few changes have occurred in
these findings since that time (Rossignolo, 2016).22 Again it is pointed out
that the VAT, the most important tax in the system, is markedly regressive,
affecting households without employed adults and without children23 in
the poorer distribution quintile to a greater extent. Male-headed house-
holds without children show the greatest regressivity (in terms of tax bur-
den) in the first, fourth and fifth quintile, while households with
double-income earners face the greatest incidence in the second quintile
for specific consumption taxes. Finally, the analysis confirms that the taxes
on specific goods, food for basic consumption, children’s clothes, public
transport, among others, show a regressive behavior and affect more
female-headed households in relative terms (Rossignolo, 2016).
In sum, in a context of relative improvement of the level of progressivity

in the tax system, such as that occurred between 2003 and 2015, and
derived from partial changes in taxes and fundamental changes in the con-
text in which they apply (mainly the improvement in activity, employment
and wage levels), direct taxes still affect relatively more lower income
households, and fundamentally those in the poorest distribution quintile.
This has a gender dimension in itself each time that women are overrepre-
sented in the population without their own incomes and in the lower
wages population. Gender bias in taxation itself does not appear to be
overwhelming (at least with the quantitative estimation that is possible
given the available sources), but it does show that taxation on certain
goods of the basic basket affect female-headed households relatively more.
4.3 Income Tax: Persistence of Inequality

Reproduction Mechanisms
As mentioned, direct tax collection has been growing in Argentina. The
biggest growth, however, is due to increasing social security contribu-
tions, a proportional tax on wages. By comparison, the personal income
tax, the tax with the highest progressive potential in the system, experi-
enced a more modest growth and still shows relevant deficiencies in terms
of distributive justice.
The tax creates gaps because of the differential treatment of income
sources. First, income from labor and capital rents are treated differently.
The latter have historically benefited from a wide range of exemptions,
including rents from financial assets, interests on government bonds, inde-
pendent treatment of dividends, exemption of all taxes on capital gains
obtained by natural persons for any concept whatsoever, among others.
Since exempted capital rents are usually concentrated in the higher income
deciles, they represent a strong regressive bias. This began to be addressed
at the end of 2013 with the imposition of a differential rate of 15% on the
purchase and sale of stocks and public bonds that are not listed on the
stock exchange and of 10% on dividends distributed by companies
(Cetrángolo et al., 2015).
Second, there are differences in the treatment on permitted deduc-
tions. The income tax law has contemplated the possibility of deducting
from the net income a certain fixed amount, according to the personal
characteristics of the subject in the concept of spouse and children and
other dependents. A certain amount to preserve a minimum income that
was not reached by the tax called “mínimo no imponible” (non-taxable
minimum) can also be deducted. Later, other deductible concepts were

added related to the character of the income obtained; such as if income
was perceived by a worker in wage employment, retired from the public
administration, or a self-employed worker. Likewise, one of the most
important deductions has the purpose to relieve the tax burden for
dependence-relation work with limited possibilities of deducting expenses
for the determination of their taxable income, on which there are also high
social security charges. In the last decade, the real values of the non-taxable
amount and deductions have been reduced as a consequence of a process
of nominal non-actualization, together with a systematic rise in wage lev-
els. This implied that large sectors of middle-income wage earners entered
in the system, thus having to pay the tax. In part, this explains the sustain-
ability of the tax collection, even in a context lacking substantive reforms
in its design and even in its monitoring and control.
Third, levels of income tax evasion are high with around 49.7% of
potential collected income is evaded, according to an estimation for 2005
(Cetrángolo & Gómez Sabaini, 2009). It is assumed that the evasion lev-
els are higher for high-income taxpayers, as these have a greater capacity
to make use of diverse mechanisms to evade obligations, for example, via
hiring specialized “creative accounting”’ services.
Fourth, one mechanism to treat taxpayers with lower incomes is not
without problems. The “monotributo” (monotax) tax scheme, equivalent
(although not exactly the same) to the fixed amount system for low-
income contributors that exists in several countries of the region has sev-
eral shortcomings. The Argentinean monotributo was created as a tax
policy instrument aiming to include those small taxpayers (mainly inde-
pendent and small-company workers) who were not paying taxes in the
formal sector, either because they have never been registered in the system
or because they were self-marginalized from it. From its beginnings
(1998), the basic structure of this regime provided the possibility for small
taxpayers to fulfill their main tax (VAT and profit tax) and social protection
(social security and health insurance) duties through the payment of a
certain fixed amount (Cetrángolo et al., 2015).
Today, the monotibuto regime consists of eleven categories ranging
from AR$ 84,00024 to AR$ 1,050,00025 annual gross income, although in
the case of location and/or provision of services the maximum limit is
AR$ 700,00026 (and only eight income brackets). The tax is determined
by a progressive scale of fixed amounts according to the level of gross
annual income for each taxpayer.
Gherardi and Rodríguez Enríquez (2008) carried out an analysis of the

gender dimensions of this tax. This study is still valid today as there have
been no substantive reforms of the design or implementation of the mono-
tributo. This study warned that the principle of individual taxation, the
indiscriminate application of rates and admitted deductions by sex, avoid
explicit gender biases. Only one principle of discrimination was observed,
that is in the attribution of the income of marital property.
The tax legislation presents a case of formal discrimination against
women by making them invisible as tax subjects with respect to the profits
produced by the community property. According to the Civil Code and
the compulsory marital property regime, which establishes that during
marriage every good acquired by the spouses are marital property—both
spouses are equal owners (except where, under certain particular condi-
tions, something different was declared at the moment of the acquisition).
It can be argued, however, that this formal discrimination does not imply
a disadvantage for women who have, as a consequence, a smaller tax bur-
den compared to their husbands since they have the ownership of the
marital property goods.
All things considered, gender gaps in income tax in Argentina appear
implicitly. The first of them relates to the existence of exemptions on some
sources of income. Through the existing exemptions in the Argentinean
tax on profits a triple inequality is visible. First, the inherent horizontal
inequality of the taxation of incomes is based on their source and not their
level. Second, the vertical inequality results from the fact that the exoner-
ated incomes come from sources that, in general, provide higher incomes.
Finally, the gender inequality results from the fact that men are overrepre-
sented among higher income sectors, and that women are benefit less
from the exemptions on financial sources since they are underrepresented
in this group.
The other set of biases is principally related to the differential treatment
according to the income source. The existence of deductions is a benefit
available for those who pay the tax on profits. That tax credit is not avail-
able, however, for the lower income population that does not reach the
threshold to pay it, or which is in the monotributo regime. This implies a
gender bias each time that women are overrepresented among the lower
income population.
At this point, it is worth emphasizing that even though the amount paid
by persons in the monotributo regime is relatively low compared to the tax
rates of the other profit tax categories, it should be highlighted that it
sually refers to low-income workers. Thus, the relative incidence can turn
u
out to be high (especially for people in the lowest monotributo categories,
and those with highly irregular incomes). In addition, people in the mono-
tributo regime are discriminated against since they cannot enjoy the ben-
efits of social protection associated with wage work, one especially relevant
from the gender perspective among these benefits is paid maternity leave.
Additionally, specifically related to allowed deductions on family bur-
dens, the regulation does not establish which spouse can make use of the
benefit (which is positive for gender equity) and in practice, both spouses
can apply. This implies discrimination for single-parent households, who
can only apply the deduction once and since these households are mainly
comprised of women, this turns out in an implicit gender bias.
Finally, Gherardi and Rodríguez Enríquez (2008) carried out a quanti-
tative estimation to study the amount that women and men should pay
according to the type of household in which they live (a household with a
man provider, a single-parent household headed by a woman, a household
with double-income providers) and the source of their income (wage work
and self-employed). They noticed that there is a horizontal inequality since,
at the same level of income, the tax incidence is different according to the
income source and the household type (in terms of provider and quantity
of dependent adult). There is also discrimination against single-parent
households, which pay a higher relative amount in every payment mode. In
this kind of household, women are overrepresented. Simultaneously, there
is a discrimination against self-employed workers since, regardless of the
household type, they always pay higher taxes than wage earners. It is worth
highlighting that women have been historically overrepresented among
the self-employed with lower incomes. Finally, self-employed women have
lower incomes since they are the only ones that, in the referred exercise,
have to pay in the case of double-parent with double-income provider
households. Wage earners in this type of household are the ones that ben-
efit the most from the profit income tax in Argentina.
In sum, we can notice that the non-existence of explicit gender bias in
the legislation of the personal income tax in Argentina does not imply that
there are no gender biases at all. On the contrary, discrimination of income
sources affects, to a greater extent, the self-employed more than those
with wage work. The self-employed are also in the lower income brackets
where women are overrepresented, and together with the application of
deductions that implicitly discriminate against single-parent households,
this leads to differences in taxation by gender.
4.4 Some Specific Measures for the Lower Income Population

(and Therefore for Women)
The VAT is the main source of tax collection in Argentina. According to
the Dirección Nacional de Investigación y Análisis Fiscal, it represents
7.40% of GDP, which is almost 30% of the overall collection. As previously
pointed out, in the Argentinean case the tax rate is high (21%) and widely
extended: it reaches all goods and services, and there is only a reduced
basket of goods of basic need that pay half tariff (10.5%). As was also men-
tioned, its relevance explains an important part of the country’s non-
progressive tax system profile, presumed to affect especially women by the
taxation on certain type of consumptions.27
Applying a reduction (which could even reach a tax rate of 0%) to a
basket of basic goods and services, even those related to care duties, is
commonly mentioned in the literature as one of the mechanisms to reach
greater progressivity in the system and improve its impact on gender ineq-
uity. However, there are also resistances to these kind of measures, arguing
that even though this type of tax affects relatively more low-income popu-
lations, those who make the biggest contribution to the collection of the
tax are the higher income sectors,28 who will also be benefited by the
reduction.
That said, there are arguments against the “universal solution” in indi-
rect taxation. It is argued that a considerable amount of the increased
disposable income resulting from a reduction in the VAT general rate, or
exemptions to a determined set of goods, or even selective reductions,
tend to benefit more in absolute terms those in higher income sectors. For
example, an exercise performed for the year 2010 shows that 64% of the
savings produced by the differential tax rate (of 10.5%) on health expen-
ditures, was appropriated by households in the eighth to the tenth income
deciles. The same happens with the 37% of the savings produced by the
differential VAT rate on milk, and the 40% of savings produced by the dif-
ferential VAT rate on some foods (meat, bread, fruit and vegetables)
(Abeles, Balasini, & Panigo, 2012). At the same time, the fiscal cost of
these measures could be excessive, and its social impact regressive, particu-
larly if the public expenditure has a progressive bias.29
For this reason, the proposal is gaining strength in the region for apply-
ing a personalized VAT that instead of reducing the nominal tax rate on
certain goods and services it diminishes the tax’s effective imposition on
some population groups.30
A measure in this regard was applied in the middle of 2016 by the

Argentinean government.31 It was not made due to concerns about the tax
system’s regressivity or as a part of a broader tax reform, but as a measure
to compensate the deterioration of fixed income’s purchasing power
because of the price acceleration process. In particular, the proposal con-
sisted of the implementation of a refund of a VAT proportion (15%) on
the amount of purchases of movable property (up to a maximum of $300
per month)32 paid with a debit card where the benefit goes to retired
people with the minimum social security benefit, and the beneficiaries of
the Asignación Universal por Hijo y la Asignación por Embarazo para la
Protección Social (AUH, Universal Allocation per Child and Pregnancy
Allocation for Social Protection).33 It is a measure with a highly feminized
incidence since women are overrepresented among the minimum social
security benefit retirees,34 and also represent most AUH beneficiaries.35
The government estimated that the measure benefits 8.4 million people.
This measure has an undeniably positive impact on the purchasing
power of these groups that correspond to the low-income population that
is highly feminized. For AUH beneficiaries, when using the benefit’s max-
imum, this represents 24% of the allocation.36 In the retirees’ case, the
benefit is relatively lower since it represents, at most, 4.6% of the social
security benefit.37 It is worth highlighting that the measure’s impact could
weaken price acceleration (as currently in Argentina) since it does not have
any automatic indexation mechanism.
5 Conclusions and Pending Challenges

The promotion of tax reforms is an imperative of tax justice in Latin
America. Currently, the low average tax burden and the regressive profile
of the tax structures constitute obstacles to reducing inequality in the
region. The revision of the literature on the gender dimension in tax sys-
tems allows us to notice that changes in the pattern of regressive taxation
is the main mechanism by which to simultaneously attend to the gender
biases produced and to improve the quality of women’s lives in practice.
Regarding direct taxation, the gender gaps observed are implicit and
could be addressed by reviewing the differential treatment by income
source, the discriminatory use of deductions in practice, and specific
regimes for small taxpayers. In particular, measures should eliminate
deductions associated with the conformation of the household (for exam-
ple, to economic-dependent relatives) and revise the regimes for small
taxpayers. This can imply high relative tax costs for a typically feminized
population and which additionally does not generate a substantive collec-
tion to the treasury, nor provide additional social security protections to
those who pay. At the same time, the biggest pending issues are the high
levels of evasion and the different mechanism of elusion that benefit the
high-income sectors.
When it comes to indirect taxation, an improvement is required in the
use of tools that enable release of regressive biases and inquire deeply into
the implications of different treatment mechanisms, not only by consump-
tion, but also by taxpayer. The international experience shows that, inde-
pendently of the countries’ degree of development and administrative
capacity, the existence of basic consumption goods exempt from indirect
taxes, or paying reduced rates, is a factor that adds progressivity to the tax
system and, as previously discussed, would be beneficial to women and the
reduction of gender gaps (Grown & Valodia, 2010).
The consideration of specific tax treatments for specific female con-
sumption goods,38 and for goods and services associated with care neces-
sities, could also improve women’s income in practice, and release the
burden on unpaid care work.
The joint move forward toward economic and gender justice requires
consistently integrating fiscal policies into the framework of macroeco-
nomic policies and into the model of development. Tax reforms are neces-
sary to provide stable and progressive financing to the states, to implement
regulatory policies that diminish inequalities inherent in the market’s
logic, to improve employment conditions, to sustain the income level and
redistribution, and to develop specific policies for gender equality.
Notes
1. The femininity index in poor households compares the percentage of poor
women and men aged between 20 and 59 years. A figure greater than 100
means that poverty (indigence) is higher among women; a figure less than
100, the inverse situation. In the Latin American case, the index shows
that there are 118 poor women for every 100 men in the same situation.
2. The most important measures are the conditional income transfer pro-
grams (see Cecchini & Madariaga, 2011) and the pension reforms that
seek to extend coverage and sustain the level of social security benefits.
3. Arenas de Mesa (2016) presents a synthesis and classification of recent
reforms in the countries of the region, highlighting that only three countries
have gone through structural tax reforms: Chile in 2014, Colombia in 2012
and Mexico in 2013. The reforms in most countries were partial transfor-
mations that sought both to extend indirect taxation (mainly of VAT), as
well as to progressively transform the income tax.
4. The average hides the differences between countries such as Argentina,
Bolivia, Brazil and Chile, with tax burden rates around 20% and cases like
Guatemala, where the tax burden is 10% of GDP. In addition, this index
refers only to the central government level and does not include social
security contributions (Arenas de Mesa (2016) based on information from
ECLAC). If they were considered as well as the levels below the central
government, the differences would be higher.
5. For a founding text of Feminist Economics see Ferber and Nelson (2003).
6. Bidegain Ponte and Llavaneras Blanco (2013) explain the interrelation
between economic, ecologic and gender justice.
7. An example of this would be the case of the maquilas, as economic devel-
opment strategies that take advantage of the lower wage cost of hiring
women. See Giosa Zuazúa and Rodríguez Enríquez (2010).
8. For a founding text on the social content of macroeconomic policies see
Elson and Cagatay (2000).
9. Here we follow Stotsky (1997), Barnett and Grown (2004) and Elson
(2006). All these papers offer international examples of the matters theo-
retically discussed here.
10. Until 1995, a differential rate was applied to married women in South
Africa. In the United Kingdom, while there was a joint assessment system,
the filing should be made by the male (Stotsky, 1997). The worldwide
trend has been towards the abolition of these kind of explicit biases.
11. Oxfam (forthcoming) further develops and provides examples of implicit
and explicit biases in taxation.
12. This implicit bias is very hard to see in practice since it requires knowing
the consumption structures by sex and the decision-making processes
around those consumptions within the households, information that is
usually not provided by the household expenditure surveys.
13. Actually, this field of study is new, with Nelson (1996) and Stotsky’s (1997)
contributions as the pioneers. This relative infancy of the theoretical con-
tributions and empirical articles in the field could be associated with the
androcentric dominant vision in economics, questioned by the Feminist
Economics which has consolidated as a field of knowledge in the discipline
since the nineties.
14. For example, in the case of Argentina, discrimination on income tax impo-
sition on marital partnership was found, since according to the law, it is
attributed to the husband. However, this bias does not imply in practice an
economic penalty to women (given that that income is added in the tax
declaration, and thus the amount of the tax paid by the husband), but it
does imply a different treatment as tax law subject.
15. According to the Observatorio para la Igualdad de Género de América
Latina y el Caribe (OIG, Gender Equality in Latin America and the
Caribbean Observatory), in the region there are 31.1% of women without
their own income, compared with 11.4% of men (considering the popula-
tion aged 15 years or more that does not study, around 2014): http://oig.
cepal.org/es/indicadores/poblacion-sin-ingresos-propios-sexo.
16. As a proxy, the available information points out that to obtain similar
wages, women have to show more years of average education.
17. Which leads to the fact that the total work burden of women is higher than
for men. An example of this gap for a selected group of Latin American
countries can be seen in: http://oig.cepal.org/es/indicadores/
tiempo-total-trabajo.
18. A gap in the conjugal unit’s income treatment was found for the case of
Dominican Republic.
19. The VAT has a tax rate of 21%, being the second highest in Latin America,
well above the regional average (15.1%). Goods of basic needs have a
reduced rate of 10.5% and sales of gas, electric energy and some services
have a differential rate higher than 27% (Cetrángolo et al. 2015).
20. Personal income tax consists of progressive rates for different net profit
brackets (to which deductions can be applied, being the more relevant by
children and spouse) from a non-taxable minimum which varies according
to personal characteristics (single, married). Part of the increase in profit
tax collection during the period is explained by the non-update of the non-
taxable minimum and the impossibility of applying inflation adjustment
mechanisms in a context of price acceleration. In the year 2017, the tax has
had modifications in the non-taxable minimums from the different catego-
ries. Hence, today the tax has nine net profit scales (from 0 to 20,000;
from 20,000 to 40,000; from 40,000 to 60,000; from 60,000 to 80,000;
from 80,000 to 120,000; from 120,000 to 160,000; from 160,000 to
240,000; from 240,000 to 320,000; and from 320,000 onwards) to which
corresponds nine tax rates (5%; $1000+9% over 20,000; $2,800+12% over
40,000; $5,200+15% over 60,000; $8200+19% over 80,000; $15,800+23%
over 120,000; $25,000+27% over 160,000; $46,600+31% over 240,000;
$71,400+35% over 320,000 respectively).
21. In the same line, personal income tax participation (compared to the
amount paid by legal persons) grew steadily, reaching more than 43% of
the total tax collection in 2013.
22. This paper is based on information from the Encuesta de Gastos de los
Hogares (Household Expenditure Survey) of 2012/2013.
23. In this income’s category, the group of one-person households comprised

by women (widows) stands out.
24. Equivalent to US $5407 per year, US $450 per month. As a point of refer-
ence, the minimum wage was stablished at US $520 in March 2017.
25. Equivalent to US $67,611 per year, US $5634 per month.
26. Equivalent to US $45,074 per year, US$ 3753 per month.
27. The last available information placed the VAT evasion at almost 20% in
2007 (Gómez Sabaini & Morán, 2016).
28. An estimation made in 2010 showed that 59% of the VAT’s collection in
Argentina was paid by households placed between the eighth and tenth
income decile (Abeles et al., 2010).
29. Gaggero and Rossignolo (2011) show how the social public expenditure
has gained progressive capacity in Argentina, mainly by the support of the
public expenditure in education, the enlargement of conditional money
transfers, and the extension of the social security coverage (the main item
of public expenditure in the country) to historically excluded sectors
(among which women are a significant majority).
30. The original proposal can be seen in Barreix, Bes, and Roca (2011). An
adjustment proposal in Argentina was made by Abeles et al. (2012).
31. It is worth highlighting that although this measure focalized in low-income
population is novel, in Argentina it existed since 2001 as a refund system
of 5% of the tax amount paid in operations made with debit or credit card,
without distinction of the beneficiary’s income level. At that time, the mea-
sure was taken as an incentive to bancarization, to promote the registration
of commercial operations. Those who most benefited were the medium-
and high-income households that have the biggest bancarization level in
their purchase operations. That measure was eliminated after January 1,
2017.
32. As a point of reference, the amount of the AUH reaches $966.
33. The Asignación Universal por Hijo y la Asignación por Embarazo para la
Protección Social, known as AUH, is the main conditional cash transfer
program of Argentina. It was implemented in 2010 and reaches more than
3.9 million children with the benefit.
34. This comes from two reasons. First, the lowest record of social security
contribution of women (compared to men) that places them in the lower
benefits and the implementation in the year 2006 of the Plan de Inclusión
Previsional (Social Security Inclusion Plan) that allowed the entry of more
than 2.5 million beneficiaries to the system, among which 75% were
women.
35. Although the benefit holders are the children, the mothers are by law the
ones who receive the benefit in practice (and only in the mother’s absence
is the amount transferred to the father or tutor).
36. Established at $1246 from March 2017.

37. Established at $6453 from March 2017.
38. De Henau, Himmelweit, and Santos (2010) highlight that sanitary female
care goods do not have the VAT tax in the United Kingdom. This line is
being promoted by the Menstruacción campaign, which has made Bills to
eliminate the VAT from menstrual management goods (http://economia-
feminita.com/menstruaccion/).
References
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Argentina: Análisis y factibilidad. 24 Seminario Anual de Política Fiscal.
Santiago: Cepal.
Arenas de Mesa, A. (2016). Sostenibilidad fiscal y reformas tributarias en América
Latina. Santiago: Cepal - BID.
Barnett, K., & Grown, C. (2004). Gender Impacts of Government Revenue
Collection: The Case of Taxation. London: Commonwealth Secretariat.
Barreix, A., Bes, M., & Roca, J. (2011). El IVA personalizado. Aumentando la
recaudación y compensando a los más pobres. Documento 8/2011. Washington,
DC: Instituto de Estudios Fiscales.
Bidegain Ponte, N., & Llavaneras Blanco, M. (2013). Interlinking Gender,
Economic and Ecological Justice in Latin America: Towards a Development Based
on the Sustainability of Life. Quezon City: DAWN.
Cetrángolo, O., & Gómez Sabaini, J. C. (2009). La imposición en la Argentina:
un análisis de la imposición a la renta, a los patrimonios y otros tributos considera-
dos directos (p. 84). Santiago: Cepal - Macroeconomía del Desarrollo Nro.
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fiscales, crecimiento e inversión (2000–2014). Santiago: Cepal - Serie
Macroeconomía Del Desarrollo N° 165.
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Balance de la experiencia en América Latina y el Caribe. Santiago: Cepal – Asdi.
Coello Cremades, R., & Fernández Cervantes, S. (2014). Política fiscal y equidad
de género en Bolivia. La Paz: Onu Mujeres - Grupo sobre Política Fiscal y
Desarrollo (GPFD).
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A UK Case Study”. En: Grown, C., & Valodia, I. (eds). Taxation and Gender
Equity. A Comparative Analysis of Direct and Indirect Taxes in Developing and
Developed Countries. New York: Routledge.
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presupuestaria desde la vertiente impositiva. El caso de España. En Paloma de
Villota (ed.) Economía y Género. Macroeconomía, política fiscal y liberalización.
Análisis de su impacto sobre las mujeres. Barcelona: Icaria Editorial.
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Gender Equity. A Comparative Analysis of Direct and Indirect Taxes in

Developing and Developed Countries. New York: Routledge.
Elson, D. (2006). Budgeting for Women’s Rights: Monitoring Government Budgets
for Compliance with CEDAW. New York: UNIFEM.
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World Development, 28(7), 1347–1364.
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Economic Man. Chicago; Londres: The University of Chicago Press.
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para la equidad de género: el caso del impuesto a las ganancias sobre personas
físicas en Argentina. Documento de Trabajo 67. Buenos Aires: Ciepp.
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equidad de género en América Latina y el Caribe: Una propuesta de abordaje y
una aplicación al caso de la IMANE en México y Centroamérica. Serie Mujer y
Desarrollo 97. Santiago: Cepal. División de Asuntos de Género.
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región. Santiago: Cepal - Serie Macroeconomía del Desarrollo Nro. 172.
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http://www.economia.gob.ar/sip/basehome/rectrib.htm
CHAPTER 7
Business Groups, Tax Efficiency,

and Regressivity in Colombia
Néstor Castañeda
1 Introduction
In the past few decades, Latin American countries successfully increased
tax burdens, improved their fiscal stabilization tools, and enhanced tax
administration agencies. Despite these achievements, the over-reliance on
non-tax revenues and indirect taxation have produced only modest
improvements in both tax neutrality and equity. Most recently, negative
external factors (e.g. the end of the commodity super-cycle) posed a chal-
lenge for fiscal stability in the region and put social achievements of the
past decade at risk. The current context of uncertainty in the international
environment makes structural tax reforms more urgent than ever.
However, implementing structural tax reforms in Latin America has
proven to be a challenge and one can count only few instances of substan-
tial tax system overhauls (Focanti et al., 2016). Political economy scholars
have studied the complexities of tax politics in the region and provided
empirical evidence that the features of tax systems in the region largely
respond to the interaction between governments and business interest
groups (Fairfield, 2015; Castañeda, 2017). In this chapter, I used the case
of Colombia to illustrate the fact that, in general, tax structures in Latin
N. Castañeda (*)
University College London, London, UK

DOI 10.1007/978-3-319-60119-9_7
188 N. CASTAÑEDA
America are slightly more efficient but still quite unfair, and recent tax
reforms neither improve vertical nor horizontal equity. These suboptimal
outcomes reflect the nature of the relationship between the government
and business interest groups and the recent evolution of corporate power
in the region.
In particular, I contend that recent transformations in the model of
business coordination and political representation (i.e. from a corporatist-
like one to a more pluralist-like one) has had a great impact on the rela-
tionship between business and the state. Traditional business associations
are not the most relevant actors involved in the policymaking process. In
most cases, diversified business groups or economic conglomerates play a
more relevant role and use completely different channels and mechanisms
to influence policymakers. As a result of the emergence and consolidation
of these new actors, the policymaking process has become increasingly
complex, less focused on the executive branch of government, and conse-
quently, structural policy changes are more difficult to achieve.
In other words, I contend that the increasing number of business veto
players with the capacity to influence policy decisions makes governance in
the region more complicated and fragmented; but most importantly,
I argue that policy fragmentation makes equitable economic development
more difficult to attain. On the one hand, the consolidation of a pluralist
model of business representation poses serious difficulties for democratic
representation. Instead of opening up policymaking to new actors, this
new model of business representation concentrates political power on a
few number of firms or economic conglomerates with technical and finan-
cial capacity to effectively lobby policymakers. On the other hand, busi-
ness interest groups are less interested in discussing broad policy issues
(e.g. economy-wide industrial policies or national development strategies)
and focus their attention on narrow, industry-specific, or particularistic
policy domains (e.g., consumer or antitrust regulation).
Therefore, policy fragmentation has become one of the most common
features of the policymaking process in Latin America and has substantial
consequences for redistribution across the region. In fact, it makes state–
business bargaining more difficult and fragmented, and provides incen-
tives for a regressive fiscal contract. Recent scholarship has provided
quantitative evidence on the political dynamics of the fiscal contract in
Latin America (e.g. Castañeda, 2017; Castañeda & Doyle, 2017), but we
still need to offer in-depth analysis of the causal business–state relations in
the region.
BUSINESS GROUPS, TAX EFFICIENCY, AND REGRESSIVITY IN COLOMBIA 189
Going down to the country-level of analysis and focusing on particular

tax reform scenarios have two main advantages: first, case studies can be
treated as ideal types and we can have a better understanding of the causal
mechanisms explaining variation in tax policy; and second, country-level
observations are ideal for process-tracing analysis.
For the purposes of this chapter, the challenge is to select a case that
allows us to understand the interaction among the actors (formally and
informally) involved in the tax policymaking process and the consequences
of these interactions for tax policy outcomes. I describe the main attri-
butes of the main actors in the tax policy game: policymakers and business
community. Once I have specified the preferences and qualities of the
actors that bargain over tax policy, I study the interaction between them
by focusing on specific tax reforms bills. I show how business communities
responded to the government’s initiative to increase taxes and how their
internal characteristics made them more or less successful than politicians
in changing the domestic tax structure. I assess who are the winners and
losers in each one of the selected tax reforms and analyze the policy effects
of their interaction. This process-tracing analysis aims to uncover the
causal mechanism that connects tax policy outcomes with different pat-
terns of business organization. In particular, I show that organizational
attributes make business more or less able to counteract the president’s
advantages in the policymaking process.
The methodological approach described above emphasizes the impor-
tance of context-specific policymaking processes and the causal mechanisms
that link preferences, incentives, and outcomes. Long-term institutional
legacies are taken into account as contextual factors, but they do not con-
stitute the main factors explaining the outcomes of the policymaking pro-
cess. In other words, I focused on the calculations and preferences of
agenda-setters and business interest groups rather than on the historical (or
short-term) processes that explain those preferences (Falleti, 2010).
Consequently, I use the case of Colombia to illustrate the effects of
economic structural changes and increasing uncertainty on tax politics in
Latin America. In particular, I show that while Colombian policymakers
are relatively successful in passing tax reforms through congress, these
reforms are never structural and only offer short-term solutions to palliate
the constant loss of fiscal space. Tax reforms in Colombia are usually par-
tial and limited in scope. Indeed, most of them are usually known as
“quick-fix” tax reforms (mini reformas tributarias). I also show that these
190 N. CASTAÑEDA
reforms are always marginal, precisely because business interest groups are
able to soften any proposals aimed to increase their tax burden or raise
corporate taxation.
The case of Colombia is particularly interesting not only because it is
one of the main economies of the region, but also because market liberal-
ization was successfully implemented and had important consequences for
the relationship between business and state. As I show in this chapter,
structural economic changes promoted industrial diversification and busi-
ness fragmentation, but paradoxically did not diminish business groups’
capacity to shape tax policy and transfer the cost of redistribution to the
middle and working classes.
Colombia also offers an unparalleled case to study tax politics in Latin
America because tax reforms abound but the general tax burden is still
lower than the regional average, tax efficiency and equity are still unful-
filled aspirations, and tax administration problems have not been solved
yet (Bonilla et al., 2016; OECD, 2015b). In some manner, Colombia
represents contemporary policy dilemmas in the region really well: politi-
cal fragmentation, substantial transformation of business interest groups,
and constants loss of fiscal space. It is definitively a good case to help us
understand why and how unequitable fiscal contracts are so persistent in
the region.
This chapter is organized as follows. First, I briefly discuss the literature
on business interest groups and taxation in Latin America. This literature
review provides a general framework to understand the role of business in
tax policymaking in Colombia. Second, I describe the evolution of tax
policy in Colombia between 1990 and 2015. I pay special attention to the
evolution of the trade-off between direct and indirect taxation. Third, I
illustrate the tax policy game in Colombia by describing the main attri-
butes and policy preferences of policymakers and business interest groups.
This section briefly describes the main business associations, conglomer-
ates, and firms that participate in tax policy debates. Fourth, I briefly illus-
trate the dynamics of the political game and its distributional consequences.
Finally, I present some concluding remarks.
2 Business Interest Groups and Tax Policy

Despite their indisputable political power, literature on business interest
groups in Latin America is rather limited. Seminal works in the field
focused on the role of business elites in authoritarian regimes and the
relationship between authoritarianism and corporatism (Malloy, 1976;

Schmitter, 1974). These works understand the role of business interest
groups from a structural perspective more focused on the state–business
relationship and pay little attention to the politics of the policymaking
process. For these scholars, the study of business interest groups was
embedded in broader debates about the inherent characteristics of devel-
opment in Latin America (Cardoso and Faletto, 1979; Evans, 1979).
In the 1990s, some scholars distanced themselves from these structural
views and expended greater effort in the study of business elites during the
regional transition to democracy and the implementation of market-
friendly policies (Bartell & Payne, 1995; Durand & Silva, 1998; Kingstone,
1999; Malloy, 1976; Payne, 1994; Silva, 1998). These studies focused
their attention on the strategies that business interest groups used to navi-
gate the recurring crises of the import-substitution-industrialization devel-
opment strategy and their capacity to adapt to democratic rule and
market-friendly policies of the late twentieth century.
Other scholars have studied other aspects of business influence and
their political consequences. For example, Schneider (2004) investigated
different patterns of business organization and business–government rela-
tions in twentieth-century Latin America and examined the distributional
consequences of those relations. From his point of view, the manner in
which Latin American states organized their relations with business inter-
est groups into more or less coordinated encompassing business associa-
tions had substantial effects on their capacity to implement effective
macroeconomic policies and sector governance. Based on this assumption,
Schneider has recently presented a theory about the relationship between
hierarchical patterns of corporate governance and the persistent inequality
trap in Latin America (Schneider, 2013).
Most recently, scholars have sought to address the particular mecha-
nisms that business interest groups use to influence the policymaking pro-
cess and the organizational factors that enable them to shape public policy.
For example, Castañeda (2017) and Fairfield (2010, 2015) explain the
bargaining process between Latin American governments and business
interest groups that takes place when defining tax policies. They identified
various sources of business political power and discussed the consequences
for tax policy in the region. For example, some scholars have shown that
business interest groups are usually more influential in the policymaking
process if the domestic economy depends more on their performance and
investment flows (Campello, 2015; Fairfield, 2015). They also predict
192 N. CASTAÑEDA
that business interest groups will be more influential if the domestic econ-
omy is less diversified. For example, Castañeda (2017) uses data for all
Latin American countries to construct a metric of business structural
power (three largest industrial sectors’ share as a percentage of total
national production) and compares it with the degree of openness of the
economy. Based on this empirical evidence, Castañeda (2017) finds out
that business interest groups in the region seem to be more powerful as
the industrial production is more concentrated around some few sectors,
especially in those countries where trade liberalization was more gradual.
Organizational attributes are also crucial to explain business political
influence. According to Schneider (2013), Fairfield (2015), and Castañeda
(2017), business interest groups are influential not only because they are
structurally powerful and can credibly threat economic stability, but also
because they have resources and organizational capabilities to successfully
participate in the policymaking process. For example, Fairfield (2015) uses
the classical concept of instrumental power to understand how business
interest groups make use of their resources and networks with policymak-
ers to influence policymakers’ decisions. In the meantime, Castañeda
(2017) focuses on the concepts of business coordination and policy inte-
gration to understand how business interest groups are more successful
than policymakers in shaping the policymaking process.
From this point of view, revenue-raising tax reforms are less likely in the
presence of highly coordinated and centralized business interest groups
because they can reduce the influence of policymakers on tax policy
(Castañeda, 2017, 126). When business interest groups are well coordi-
nated, they have political leverage and organizational resources to block
tax reform bills in congress. Meanwhile, when business interest groups are
not centrally coordinated or poorly integrated to policymaking forums,
they will be less able to play the tax politics game and they can only reduce
potential impacts on specific industries (Castañeda, 2017, 126).
In other words, centralized coordination and high levels of policy inte-
gration make business interest groups more influential in the tax policy-
making process (Castañeda, 2017). Also, the effect of business unity is
magnified if there is no ideological convergence between policymakers
and business interest groups (Castañeda, 2017), but also if the party sys-
tem is relatively unstable or fragmented (von Schiller, 2016). In both
cases, revenue-raising and/or progressive tax reforms are more difficult to
achieve.
Therefore, based on this literature, we can analyze the main features of

tax policy as the result of domestic patterns of business coordination and
policymakers’ tax policy preferences. In the following sections, I illustrate
these mechanisms using the case of Colombia. But, first, let us describe
the main characteristics of the Colombian tax structure.
3 Tax Revenue in Colombia, 1990–2015

Tax revenue in Colombia increased substantially over the past 25 years
from about 10% of GDP in 1990 to 20% of GDP in 2015. However, tax
revenues in Colombia are always below the regional average, which
increased from about 15% of GDP in 1990 to 22% of GDP in 2015. The
gap is even larger in comparison with OECD countries where average tax
revenue oscillates between 32% of GDP in 1990 and 34% of GDP in 2015.
In other words, tax revenue in Colombia is quite low given its level of
economic development and the size of the economy (OECD, 2015a). In
fact, according to the IADB, tax revenues in Colombia are around 4 per-
centage points of GDP less than the expected level for an economy of its
level of complexity and economic development (Corbacho et al., 2013).
In terms of fiscal structure, there has been a substantial trade-off
between direct and indirect taxation in the past few years. While direct tax
revenues decreased from 47% of the total tax revenues in 1991 to about
38% in 1996, indirect taxes increased from 50% to about 61% of the total
tax revenues in the same period. This trend reversed its direction for the
first time in 1998–1999 and then in 2008–2009. In both cases, policy-
makers responded to negative global market conditions by increasing per-
sonal and corporate tax income rates, and by creating new taxes (e.g.
wealth taxes and gasoline taxes). Consequently, the gap between direct
and indirect taxation has decreased slightly, but Colombian tax structure
is still quite dependent on indirect taxes (VAT and other taxes on goods
and services).
For example, almost half the central government tax revenue comes
from indirect taxes. The share of VAT in total tax revenues remains stable
between 1990 and 2010, and it only partially decreased in the 2010s.
Certainly, VAT rates are relatively low in Colombia (at least in comparison
with other countries in the region and OECD countries): there is a large
number of goods and services that are exempt and tax evasion rates are
quite high (Bonilla et al., 2016, 38, 115). VAT revenues represented
about half of the total tax revenues in early 1990s, but their contribution
194 N. CASTAÑEDA
has decreased since 2010 (e.g. VAT revenues were about 40% of the total
tax revenues in 2015). This is mainly a result of a continuous shrinking of
the VAT base (Bonilla et al., 2016, 122), which has substantially reduced
its levels of efficiency and productivity (Corbacho et al., 2013; Gomez
Sabaini & Moran, 2014).
In the meantime, income taxes are about a third of total tax revenues
and their contribution increased slightly since 2010. However, income
taxation is relatively low in Colombia (at least in comparison with OECD
countries) and most income taxes are levied on corporations rather than
individuals (personal income taxes are only 15% of the total income tax
revenue). On the one hand, income thresholds for personal income taxa-
tion are high: around 2.8% of the GDP per capita, in contrast with an
average threshold of 0.25% of GDP in OECD countries. On the other
hand, tax administration privileges payroll taxes over any expansion of per-
sonal income tax base. Furthermore, only some few corporations paid
income taxes because tax exemptions are numerous. Consequently, income
taxes are increasingly paid by a small minority. Some conservative calcula-
tions indicate that income tax exemptions could represent about 0.5% of
the GDP in 2015 (Bonilla et al., 2016, 56).
Income taxation in Colombia is not only inefficient, it is also quite
unfair. The effective tax rate on the top 1% of earners is only 11%, which
was the average minimum personal income tax rate in OECD countries in
2014 (Alvaredo & Londoño, 2013; Bonilla et al., 2016). The marginal
corporate tax rate remained almost constant since 1990 at 30% of net prof-
its, increased to 35% of net profits in 1997, then increased again in 2003 to
38.5% in 2003 to pay for president Uribe’s national security strategy
(Flores-Macias, 2014), and it was finally reduced to 33% in 2006 during
Uribe’s second term. Top corporate income tax rates were increased by the
Santos administration to 38% in 2014. Meanwhile, VAT rates increased
steadily since the late 1980s up to a 16% rate in 1996 and remained con-
stant until the 2016 tax reform when general rate was raised to 19%.
These data seem to suggest that tax burden was higher on consumers
during the years of the structural adjustment, and then corporate and indi-
vidual income taxes increased slightly. However, empirical data show that
this observation is actually incorrect. On the one hand, corporate tax rates
increased after 1997, but all tax reforms implemented after the financial
crisis in 1998 introduced numerous tax exemptions that mostly benefit
corporations and affluent Colombians. On the other hand, the VAT rate
remained almost constant between 1997 and 2015, but the VAT base was
sequentially extended to goods and services that were not traditionally

subject to taxes such as food, medicine, or books.
In the meantime, the national tax agency also improved its administrative
capacity to collect VAT and its enforcement capacity to punish VAT evasion.
In other words, more poor and middle-class individuals were caught in the
tax net via indirect taxation, while income tax base narrowed down.
The narrowing of the income tax base reflects failures of the tax policy
(e.g. proliferation of tax exemptions) and has strong consequences for
income redistribution. For example, Fig. 7.1 shows that there has been no
progress in income redistribution in Colombia: top 1% income share is
equal to that of 25 years ago. But most importantly, Fig. 7.1 also shows
that tax policy in Colombia is completely ineffective as redistribution tool:
the difference between top 1% income shares before and after taxes is
almost none.
The gap between direct and indirect tax revenues seems to have shrunk
not as a result of serious improvements in tax efficiency or fairness, but as
an unexpected consequence of favorable macroeconomic conditions
(which always have a positive effect on direct tax revenues) and an increas-
ing (but veiled) pressure on consumers and the middle class. A detailed
description of the numerous tax reforms implanted in the past two decades
provides strong evidence for this argument.
Fig. 7.1 Colombia, 0.22

top 1% income shares, Before taxes
After taxes
1990–2010
Source: Created based
Top 1% Income Share
on data from World Top 0.20

Incomes Database
0.18
0.16
1995 2000 2005 2010

Year
196 N. CASTAÑEDA
3.1 Tax Reforms in Colombia 1990–2016

Table 7.1 describes tax reforms implemented in Colombia between 1990
and 2016. In the past 25 years, every president in Colombia implemented
at least two tax reforms during their time in office. However, none of these
reforms could be classified as a structural or an efficiency-oriented tax
reform. Most of them only introduced small changes to the tax structure:
small tax rate changes, tax base expansions, implementation of new taxes
(e.g. financial transactions tax), or tax administration reforms. One could
classify all these reforms as “piecemeal” or “quick-fix” tax reforms only
aimed to increase tax revenue in the short run (Olivera et al., 2010).
The recent evolution of the value-added taxes (VAT) illustrates quite
well the attributes of these “quick-fix” reforms. The VAT was adopted in
Colombia in the 1970s to pay for subnational governments’ expenditures.
After the implementation of market-friendly reforms, the VAT became
one of the most important sources of tax revenue for the Colombian gov-
ernment. Consequently, it is not surprising that most of the tax reforms
implemented since 1990 were aimed to modify VAT rates or extend its tax
base (see Table 7.1).
VAT rates increased from 10% to 12% in 1990, from 12% to 14% in
1992, raised again from 14% to 16% in 1995, and to 19% in 2016. Between
1995 and 2016, most changes were rather focused on the lists of items
that are subject to VAT. Vehicles, communications, hotels, and air trans-
portation are subject to VAT since 1990; alcoholic beverages (except beer)
since 1992; cigarettes since 2000; beer since 2003 (with preferential
rates); and security services since 2012. The list of non-taxable items grew
substantially since 2000 to include food, raw materials, medical services,
public transportation, and public utilities, among others (Bonilla et al.,
2016; World Bank, 2012).
Unsurprisingly, tax policy debates in Colombia usually focus on VAT
exemptions and preferential rates, and it is not uncommon to observe
sectoral business associations lobbying for VAT exemptions for their prod-
ucts or for industrial sectors that supply them with raw materials.
Table 7.1 also illustrates the evolution of income taxation between
1990 and 2016. First of all, one can observe that no major changes were
made to personal income taxation before 1998. Tax reforms in 1990,
1992, and 1995 only modified tax rates minimally or established new tax
credits for donations and investment in strategic sectors. For example,
Gaviria’s administration increased top marginal income tax rates from 35%
Table 7.1 Tax reforms in Colombia 1990–2016
Year Administration Law Modification
1990 Gaviria Law 49 1990 VAT basic rate increased from 10% to 12%;
tax exemptions reduced;
Administrative Reform
1992 Gaviria Law 6 1992 VAT rate increased from 12% to 14%; some
goods excluded from VAT (i.e. basic
consumer basket and some agricultural
equipment not produced in the country);
income tax rate increased to 37.5%; VAT on
capital goods made deductible (shift from
income to consumption VAT)
1995 Samper Law 223 1995 Income tax rate reduced to 35%; VAT rate
increased to 16%
Reduced exemptions in income tax and
VAT; strengthened the minimum
presumptive income tax regime; personal
enterprise considered a limited liability
company; tax treatment of commercial
leasing defined; capital losses deduction
against the capital gains tax
1997 Samper Law Foreign investment and academic research
383/1997 incentives created
Decree External financing tax created; stamp tax
81/1997 increased from 0.5% to 1%
1998 Pastrana Law Broadening Corporate Income Tax base
488/1998 Broadening VAT base; VAT tax rate reduced
Decree to 15%; financial transactions tax rate created
2331/1998 at 2 per thousand
2000 Pastrana Law Broadening VAT base; financial transactions
633/2000 tax rate increased from 2 to 3 per thousand
2002 Uribe Decree VAT expansion, Corporate Income Tax
838/2002 increased, other taxes; Net wealth tax
Law 788/ created: 1.2% of patrimony once (“War
2002 Tax”)
Income tax rate increased to 38.5%;
broadening VAT base; controls to evasion
established; new exemptions for specific
economic activities (loopholes)
2003 Uribe Law Financial transactions tax rate increased from
863/2003 3 to 4 per thousand; net wealth tax
reestablished (“War Tax II”); deductions to
investment established (loopholes)
(continued)
198 N. CASTAÑEDA
Table 7.1 (continued)
Year Administration Law Modification
2005 Uribe Law 1004/ Income tax rate reduced to 15% to firms in
2005 free trade zones
2006 Uribe Law Decreased Income Tax rates from 35% in
1111\2006 2006 to 34% in 2007 and to 33% in 2008;
eliminated dividend tax on non-residents;
financial transaction tax permanent
2012 Santos Law Reduced Corporate Income Tax rate from
1607/2012 33% to 25%; Reduced Capital Gains Tax rate
from 33% to 10%; introduced a new 8%
income tax on equity ( “fairness tax”);
modified the various rates for VAT to three:
0%, 5%, and 16%; broadening VAT base
2014 Santos Law Changes in temporary net wealth tax rate;
1739/2014 extended new income tax on equity until
2018 and increased rate to 9%; new income
tax exemptions; tax amnesty
2016 Santos Law Elimination of income tax on equity
1819/2016 (CREE); Corporate Income Tax rate
increases from 25% to 34% and it is
scheduled to decrease to 33% in 2018;
increase to CIT rates in free trade zones
from 15% to 20%; new 5% income tax
withholding on dividends; financial
transactions tax (0.4%) becomes permanent;
VAT general rate increases form 16% to 19%
and its base was expanded
Source: Based on PwC Tax Insights from International Tax Services
to 37.5% in 1992, but this change was reversed by President Samper in

1995. Major changes were made in the late 1990s and the 2000s. In
1998, personal income tax base was extended and several exemptions and
deductions were eliminated. Top marginal tax rate was increased to 38.5%
in 2002 and new anti-evasion policies were announced. These changes
were adopted as part of the government’s response to the global financial
crisis in 1998 (Sanchez & Espinosa, 2005). Limited access to international
financial markets, deterioration of social conditions, and growing unem-
ployment rates demanded major fiscal efforts that could not be afforded
by taxing the working and middle classes alone. Under these new
circumstances, increasing direct taxation seemed unavoidable and conser-
vative governments responded consistently (Sanchez & Espinosa, 2005).
However, high income tax rates did not last long. In 2003, Uribe’s
government announced numerous tax deductions and exemptions for
investment in strategic sectors. In 2006, income tax rate was reduced to
35% and Congress approved a gradual reduction from 35% in 2006 to 33%
in 2008. In other words, Uribe’s government temporarily increased tax
pressure on personal and corporate income taxation for economic recov-
ery purposes, and then such pressure was gradually reduced once the crisis
was over and the country (like most of its neighbors) entered into a new,
almost unexpected path of economic prosperity. This additional tax effort
also contributed to finance the national security strategy aimed to military
defeat leftist guerrillas (Flores-Macias, 2014). In 2012, Santos administra-
tion implemented new reforms aimed to reduce personal income rates
from 33% to 25% and created an additional income tax (Impuesto Minimo
Alternativo Nacional) for taxpayers who receive net salaries greater than
US$1800/month.
Like in the case of VAT, tax reforms have mostly changed income tax
base rather than rates. In other words, introducing tax deductions and
exemptions is more common than creating new tax credits. The case of
corporate income taxation is quite illustrative. A number of tax deductions
for investment in scientific research were approved in 1992. Tax exemp-
tions were created for foreign investment funds, non-profit organizations,
educational institutions, religious organizations, and political parties in
1995. Corporate income tax base was extended and the maximum rate
was raised from 30% to 35% as part of the 1998 austerity plan. The 1998
tax reform also included generous tax deductions for “job creators.” Uribe
administration established a net wealth tax of 1.2% on individual property
and increased corporate income tax rate to 38.5% of net profits in 2002.
However, the main purpose of his first tax reform was to establish numer-
ous tax exemptions for palm oil production, foreign direct investment,
and free trade zones. In his second term in office, Uribe reduced corporate
tax rate to 33% and temporary tax exemptions were permanently included
in the tax structure. As mentioned above, President Santos also reduced
the top corporate tax rate from 33% to 25% in 2012. Observe that lower
corporate income tax rates were usually compensated with the adoption of
new, temporary taxes that were presented to the public opinion as dis-
tributive fiscal tools, but actually had quite regressive effects on small
business and the middle class (e.g. financial transactions tax, net wealth tax
or “war tax”, or “equity tax”).
200 N. CASTAÑEDA
The examples above show that tax reforms in Colombia are not only
quite frequent, but they are also biased toward indirect taxation and intro-
duce significant distortions in personal and corporate income taxation.
The main consequence of this policy bias is that tax burden shifted to the
middle and lower classes. In other words, the Colombian tax system is not
only inefficient (tax revenues are relatively low), but it also upside down
and unfair with poor people and middle classes paying more and rich peo-
ple and corporations paying less (see Fig. 7.1).
4 Business Groups, Policymakers, and Unequal

Fiscal Contracts
Why is Colombian tax system upside down? Fiscal policy in Colombia is
inefficient and unfair because, although Colombian policymakers are rela-
tively successful in passing tax reforms, these reforms are usually conceived
as short-term policies to palliate the persistent loss of fiscal space and not
as structural policies aimed to support countercyclical fiscal policies and
reduce inequality. In the section above, I show that tax reforms in
Colombia are usually partial and limited in scope. In this section, I argue
that these reforms are partial and limited because business interest groups
in Colombia have been able to soften any proposals aimed to increase their
tax burden. In other words, tax politics does not promote tax efficiency or
fairness. Thus, to understand the distributional consequences of tax poli-
tics in Colombia, we need to have a clear idea of policymakers and business
interest groups’ policy preferences and how they interact to each other in
the policymaking process.
4.1 Policymakers
The policy preferences of policymakers are the first entry point to tax poli-
tics in Colombia. We could reasonably contend that no matter their parti-
san allegiances or their ideological agendas, policymakers in Colombia
usually prefer to increase fiscal revenues rather than cut government
expenditures.
Table 7.2 describes Colombian presidents’ ideology and partisan pow-
ers (i.e. size of their legislative coalitions) between 1990 and 2016. During
this period, most of the presidents and the members of the economic cabi-
net were somewhat affiliated to either the liberal or the conservative party
Table 7.2 Colombia: President’s ideology and partisan power, 1990–2016

Period President Party Party Tax policy Partisan
ideology preferences powersa
1990–1994 Cesar Gaviria Liberal Party Center- Taxer Fairly

right strong
1994–1998 Ernesto Liberal Party Center- Taxer Fairly
Samper right strong
1998–2002 Andres Conservative Right Taxer Weak
Pastrana
2002–2006 Alvaro Uribe I Primero Colombia Right Taxer Strong
2006–2010 Alvaro Uribe Primero Colombia Right Taxer Strong
II
2010–2014 Juan Santos Unidad Nacional Center- Taxer Strong
right
2014–2018 Juan Santos Unidad Nacional Center- Taxer Strong
right
Size of the government coalition. Source: Author’s fieldwork and Murillo et al., 2010
a
(or political movements closely associated to these parties). They could be

certainly classified as center-right or right-leaning politicians.
Data presented in Table 7.2 also suggest that their fiscal policy prefer-
ences are not correlated to their ideological or partisan affiliations. Recent
presidents were somewhat affiliated to the two traditional parties: liberal and
conservative. Cesar Gaviria (1990–1994), Ernesto Samper (1994–1998),
and Juan Santos (2010–2014) have been important figures within the
Liberal Party. Meanwhile, Andres Pastrana (1998–2002) and Alvaro Uribe
(2002–2010) were somewhat connected to the Conservative Party.
Ideological distinctions between both parties (Liberal and Conservative)
were relatively clear before the late 1950s, but they practically disappeared
after three decades of power-sharing democracy—the so-called Frente
Nacional (Hartlyn, 1988), and decades of electoral fragmentation made
ideological differences disappear (Dargent & Muñoz, 2011).
Political economy scholars suggest that right-leaning politicians are
more prone to fiscal discipline, and more willing to reduce expenditures
and taxes (Alesina et al., 1992; Alesina & Rosenthal, 1995). However, this
is not the case for right-leaning politicians in Colombia (and arguably in
Latin America). Fiscal conservatism is not an essential part of the rightist
political discourse or its policy version in Colombia. Indeed, in contexts of
fiscal stress, they usually prefer to increase taxes rather than adopt radical
202 N. CASTAÑEDA
programs for reducing expenditure. The explanation is rather simple. On

the one hand, there are no political incentives to praise fiscal conservatism
because there are no challengers (with real chances of getting elected)
credibly promising austerity. On the other hand, Colombian rightist poli-
ticians can easily claim credit for the implementation of a number of social
and poverty alleviation programs (Gonzalez, 2011; Baez et al., 2012), so
they have strong incentives to increase public spending.
So, if they have similar preferences regarding public spending, are their
tax policy preferences any different? They are indeed. In fact, one can dis-
tinguish among them by their preferences about taxation. All of them
seem to prefer raising revenues as the best fiscal-reduction policy tool, but
some are more concerned about tax efficiency while others are more wor-
ried about equity. The first group is more concerned about the effect of
taxation on productivity and competitiveness. From this perspective, the
purpose of any tax reforms should be always consistent with the economic
principle of promoting and protecting domestic and foreign investments.
Then, tax reforms should be focused on reducing direct taxation and
increasing indirect taxes. The second group is more concerned about the
effects of taxation on inequality (at least, they frame their attempts to
reform the tax structure as policies to reduce inequality). Then, tax reforms
should focus on the negative impact of indirect taxation on redistribution
and collect more direct taxes.
Unfortunately, research on policymakers’ tax policy preferences in
Latin America is only an emergent field of research (Castañeda, 2017;
Stein & Caro, 2017). Therefore, we need to assume that partisan cues are
enough to fully identify policymakers’ preferences.
4.2 Business Interest Groups

The theoretical framework presented in section two suggests that business
power can be understood as a combination of structural and organiza-
tional (instrumental) power. Based on this framework, one can describe
business interest groups’ political power in Colombia.
First of all, one can observe that economic openness increased sub-
stantially in Colombia, especially in the 2000s when trade liberalization
seemed more consolidated and the government made substantial efforts
to build new trade partnerships with other Latin American countries,
China, and the United States (Ramirez, 2005). However, higher levels of
trade openness did not necessarily translate into higher levels of industrial
diversification. The economy became more open to external trade, but

domestic industrial structure remained quite concentrated. In other
words, economic liberalization did not necessarily translate into industrial
transformation, and it only changed ownership patterns at the firm and
industry levels (Garay, 1998; Garcia Isaza, 2005; Jaramillo & Parra,
2012; Misas, 2002). Thus, one could reasonably argue that business
interest groups in Colombia are market-powerful, because domestic
industrial production is not only weakly diversified but also because there
were no significant changes in the industrial structure.
On the other hand, one could reasonably demonstrate that business’
organizational power is rather low in Colombia. There is an economy-
wide, encompassing business association—Consejo Gremial Nacional
(CGN)—that represents the most important industrial sectors in Colombia
(they represent about 60% of the domestic industrial production).
However, the CGN is institutionally weak, does not have strong linkages
with the state (it relies on social or personal networks), and does not have
real capacity to enforce any decisions among its members. In fact, the
CGN does not have its own headquarters and is poorly staffed. The CGN’s
coordination committee, integrated by executives from all affiliated sec-
toral business organizations, makes consensual but not enforceable deci-
sions. In other words, the CGN only works as a coordination mechanism
to influence public opinion, but it does not have real power for policymak-
ing purposes.
Business political power comes from sectoral associations and economic
conglomerates (grupos), because they are better organized, better staffed,
and better resourced for political influence activities. This particular pat-
tern of business coordination has strong consequences for business politi-
cal influence. The CGN can frame public opinion regarding some policy
issues, but it does not have actual operational capacity to undertake any
complex political maneuvers like lobbying or making financial contribu-
tions to political campaigns. Therefore, top executives from sectoral asso-
ciations and economic conglomerates usually undertake these tasks.
Additionally, the CGN’s decisions are effective only if there is a consensus
among all sectoral associations about the policy issues under debate.
Otherwise, every sectoral association displays its own strategies and politi-
cal influence activities.
The relationship between business associations and economic con-
glomerates is a second source of institutional weakness. The Ardila-Lule
group consists of several firms operating in the manufacturing and media
204 N. CASTAÑEDA
industries. The Santo Domingo group focuses its activities on media and
financial holdings. The Sarmiento-Angulo group concentrates several
firms in the banking and construction sectors. The Sindicato Antioqueño
group consists of several firms operating in the manufacturing sector.
Several insurance companies integrate the Bolivar group.
Like in most of the countries in the region, the emergence of economic
conglomerates constitutes the most important transformation of the
Colombian industrial structure in recent years (Garay, 1998; Misas, 2002;
Peres & Garrido, 1998). They have displaced traditional business associa-
tions as the dominant actors in the policymaking arena and gained control
over large portions of domestic production and external trade. By making
large financial contributions, economic conglomerates have taken over a
number of sectoral business associations and their executive boards
(Rettberg, 2005). Consequently, economic conglomerates have become
strong veto players within sectoral and economy-wide encompassing busi-
ness associations. For example, the influence of the Grupo Santo Domingo
and the Grupo Ardila-Lule on the decisions made by the industrialist asso-
ciation (ANDI) is uncontestable (Rettberg, 2003, 2005).
Economic conglomerates also have strong incentives to run political
operations outside the umbrella of the formal business organizations.
Their increasingly generous campaign contributions give them direct
access to politicians and bureaucrats in both executive and legislative
branches. Although data about campaign contributions are not transpar-
ent in Colombia, different journalistic sources show that economic con-
glomerates (or grupos) are the main donors in the presidential and
legislative electoral contests (Lewin & Rudas, 2013; Transparencia por
Colombia, 2014, 2016). As sectoral business associations are not legally
allowed to contribute to electoral campaigns, most of the corporate dona-
tions are channeled through individuals or firms connected to the eco-
nomic conglomerates.
Thus, political finance regulation in Colombia makes economic con-
glomerates quite influential for the policymaking process. In fact, it is not
uncommon to find CEOs and top executives from the economic conglom-
erates meeting legislators or actively lobbying in congress. For example, the
Bavaria’s CEO (one of the Grupo Santo Domingo’s flagship firms) person-
ally organized the pro-business legislative caucus that opposed the 1992
tax reform (Parra, 2004). The presence of economic conglomerates in con-
gressional and technocratic discussions is regular, “institutionalized,” and
increasingly professionalized (the number of professional lobbyists who
work directly with legislators and regularly attend committee hearings and
general floor meetings has risen substantially in the past two decades).
Before the predominance of the economic conglomerates, business
lobbying was controlled by a small group of former cabinet members,
former legislators, and prestigious lawyers. Lobbying was a matter of net-
working, not a matter of resources. Firms and business associations usually
hired individuals with strong personal connections with the president,
cabinet members, or pivotal legislators. Lobbying was based on compli-
cated networks of personal favors and patronage established between
members of the political and economic elite (Rettberg, 2003, 2005).
Market liberalization made these traditional lobbying strategies com-
pletely obsolete. The emergence of new, powerful, and complex economic
conglomerates required more sophisticated strategies for political influence
(Parra, 2004). On the one hand, the owners of the economic conglomer-
ates were not necessarily the members of traditional upper classes in
Colombia. For example, Carlos Ardila-Lule and Luis Carlos Sarmiento
Angulo were raised in middle-class neighborhoods and their fortunes were
not inherited. Their social connections with traditional political elites are
relatively new (at least, in comparison with Julio Santo Domingo or the
members of the Sindicato Antioqueño who inherited their fortunes and
were part of the aristocracy since the late 1800s). Consequently, their link-
ages with political and bureaucratic elites were not as fluid as their counter-
parts in the traditional business associations (e.g. coffee growers). A new
industrial and economic structure required policymakers and lobbyists with
higher levels of technical expertise. For example, financial and tax regula-
tions are far more sophisticated after market liberalization (Abascal et al.,
2011). Thus, traditional lawyers (usually specialized in constitutional, civil,
or criminal law) are not prepared anymore to deal with the complexities of
the financial and capital markets. In other words, there are strong incen-
tives for the professionalization of lobbying activities and this explains the
recent boom of the consulting and lobbying sector in Colombia.
In summary, the pattern of business organization in Colombia can be
described as one in which business centralization and unity is relatively
weak and sectoral business associations are influential, operationally effi-
cient, and relatively autonomous. In addition, economic conglomerates
are becoming dominant actors and have taken over sectoral and encom-
passing associations. Finally, lobbying firms are becoming increasingly
powerful and influential. In other words, business political influence activ-
ities are less institutionalized but more professionalized. Consequently,
206 N. CASTAÑEDA
economic conglomerates and individual firms are more influential than

sectoral and economy-wide encompassing associations. Colombian busi-
ness interest groups are definitively moving toward a more pluralist, frag-
mented model of business representation.
5 Pluralism and Tax Policy

The evolution of business interest groups toward a more pluralistic model
of business organization explain why a large number of tax reforms have
been adopted in the past two decades and why those reforms are always
partial rather than structural. In particular, we can argue that business
interest groups in Colombia seem to be quite successful in diminishing the
scope of tax reforms; however, their political influence and level of organi-
zation is not enough to completely kill them. Therefore, better-resourced
sectoral associations and economic conglomerates focus their attention on
two policy issues: (1) preventing any increases in the top marginal corpo-
rate tax rates, and (2) protecting or gaining tax exemptions and credits
that benefit their industrial interests. They do not engage in broad debates
about the principles of tax policy or its effects on economic development
and redistribution. They focus on narrow, particularistic goals. Their
capacity to accomplish such goals depends on their own resources and
their access to the policymaking process.
Therefore, tax reforms in Colombia are always narrow and unfinished
because both policymakers and business sector are not powerful enough
to impose overwhelming victories. On the one hand, low levels of business
coordination in Colombia indeed facilitate the recurrent implementation
of reforms, but they also create serious obstacles to the implementation of
consistent or coherent tax policies. Business interest groups are not coor-
dinated enough to permanently stop government’s attempts to increase
the tax burden; however, they are strong enough (at the sectoral-level and
the conglomerates-level) to introduce hundreds of tax loopholes aimed to
protect the interests of particular industries. On the other hand, Colombian
policymakers, always looking for new sources of tax revenue are relatively
successful in implementing tax reforms. However, they do not have
enough partisan and constitutional powers to implement structural
reforms. Or their links to the business sector are stronger than their policy
preferences and needs.
Unlike other countries in Latin America, in Colombia sectoral and
industry interests prevail over economy-wide interests, and business
c entralization is more formal than functional. Thus, the emergence of a

fragmented model of business organization provides strong incentives for
business interest groups and politicians to embrace complex, inefficient,
and unfair tax structures. On the one hand, the emergence of economic
conglomerates and the persistence of some sectoral business interests
increased the number of veto players involved in tax policymaking and
caused policy fragmentation. On the other hand, tax policy bargaining is
so complex that only few players can effectively participate and push their
interest.
This situation is quite disadvantageous for unorganized and not well-
resourced interest groups or groups of citizens. Policymakers (in a con-
stant quest to increase revenues) respond to policy fragmentation by
transferring the costs of taxation to groups that are not well represented in
the policymaking process or do not have enough resources for lobbying or
funding electoral campaigns. In a context of fiscal stress, income tax
exemptions and deductions, and shrinking income tax bases are replaced
with more indirect taxation and partially regressive new tax schemes. If
facing a trade-off between efficiency and equity, Colombian policymakers
seem to prefer increasing revenues and avoiding economic distortions
than distributing tax burden fairly among taxpayers.
As I discussed above, this is not a policy decision merely based on ideo-
logical or partisan criteria; it is a policy response to the structural attributes
of the economy and the patterns of business representation. In others
words, the institutional complementarities across different spheres of the
economy shape the attributes of the fiscal contract in Colombia and
explain the persistence of inefficient and unfair tax policies.
6 Concluding Remarks

The lack of fiscal space has been a major constraint for macroeconomic
stability in Colombia. Most governments have proposed raising tax reve-
nues and implemented several tax reforms since the early 1990s. However,
none of these reforms are structural and their impact on efficiency and
equity is rather limited.
In this chapter, I argue that the political influence of business interest
groups could partially explain the limitations of tax policy as a policy tool
for economic growth and redistribution. It is increasingly difficult to
implement structural tax reforms not only because legislative bargaining is
increasingly complex, but also because more business actors are involved
208 N. CASTAÑEDA
in the process. Unlike the previous corporatist-like model, policymakers

negotiate tax policy with an increasing number of business interest groups.
Instead of negotiating broad policy agendas or highly salient issues, highly
fragmented business interest groups lobby for industry-specific tax exemp-
tions, sector-targeted tax deductions, or specific preferential treatment to
capital income. And consequently, only business interest groups with priv-
ileged access to policymaking networks or sufficient resources to fund lob-
bying and electoral campaigns accomplish their goals. Meanwhile,
under-resourced business interest groups (or interest groups, in general)
are exposed to increasing tax burdens on their economic activity. Non-
organized citizens are less resourced than diversified business groups, and
consequently, they are often defeated in the policymaking process and pay
the costs of fiscal austerity policies.
This new political arrangement definitively shapes the fiscal contract in
Colombia. On the one hand, it opens the window for indirect taxation to
become the main source of tax revenues. On the other hand, corporations
and affluent individuals find mechanisms to circumvent high income tax
rates and transfer the tax burden to the less-organized and less-influential
middle classes. Therefore, Colombian reformism does not strike any bal-
ance between efficiency and equity. On the contrary, it perpetuates an
unsustainable fiscal contract.
The study of the Colombian case allows us to formulate some hypoth-
eses about the fiscal contract in Latin America. First of all, this case illus-
trates quite well the evolution of business interest groups in the region. As
Schneider (2013) has carefully demonstrated, the emergence of diversified
business groups in the region transformed state–business relationships and
has important consequences for the implementation of fiscal, industrial,
and social policies. This chapter illustrates how pluralistic models of busi-
ness representation shapes policymaking and limits government’s capacity
to deal with fiscal pressures. Second, the analysis of the Colombian case
also illustrates quite well the effect of changes in state–business relations
on the regional fiscal contract. As I have shown in this chapter, the most
important actors for fiscal policymaking, policymakers and business inter-
est groups, face incentives that make it very difficult to implement
progressive tax policies or to simply use tax policy to reduce inequality.
As Mahon et al. (2015) have recently discussed, the political economy of
tax reform makes almost impossible to introduce progressivity in the tax
structure. This chapter provides an explanation focused on the role of the
elites and their effectiveness to resist direct taxation and prevent the
evelopment of state capacity. The lack of progressivity in Colombian

d
taxation is not exceptional in Latin America. In fact, the Colombian fiscal
contract exemplifies quite well the challenges societies face to implement
progressivity in taxation in the most unequal region of the world.
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CHAPTER 8
Tax Incentives in Latin America:

The Case of Guatemala
Mauricio Garita
1 Introduction
Tax incentives are commonly defined as mechanisms to reduce taxes for busi-
ness and individuals in exchange for specific desirable actions by these actors
(Rabinowitz, 2016). The rationale of a tax incentive is that, given the privi-
lege, the taxed subject will use the surplus to invest in an economic activity. In
Latin America, the relation between tax incentives and private sector growth
was an idea implemented for the first time by governments in the 1970s.
Studies for Latin America, however, show that tax incentives tend to have
limited effects on growth, obscure the administration of taxes and are often
associated with corruption (Bernardi, Barreix, Marenzi, & Profeta, 2007).
Alexander Klem (2009) stated that the benefit of a tax incentive is hard
to assess, difficult to quantify and often controversial in the long run.
The Institute of Taxation and Economic Policy lists the pitfalls of tax
incentives in four categories: (a) they are insignificant for business invest-
ment decisions, (b) they create distortions in the market and disloyal
competition, (c) they are often paid by the citizen, and (d) if tax incen-
tives are high they compromise the fiscal space of the state. Thus, the
costs of tax incentives may counterbalance their original purpose and
M. Garita (*)
Instituto Centroamericano de Estudios Fiscales,
Ciudad de Guatemala, Guatemala

DOI 10.1007/978-3-319-60119-9_8
214 M. GARITA
involve a negative long-term effect on the well-being of citizens

(UNCTAD, 1996). For instance, by applying a cost–benefit analysis, a
study of tax incentives in the United States and Western Europe in the
period of 1983–1995 shows that the cost of such measures varied from
US$ 13,000 to US$ 250,000 per new job. In addition, these costs tended
to increase steadily during the observational period (Easson & Zolt,
2002: 8). This demonstrates that the policy aimed at creating jobs may
produce costs in the long run that outpace any short-term benefits.
Although the positive effects of tax incentives have been questioned,
such fiscal policy measures are frequently used in Latin American countries
as well as in the OECD. Thus, the question of why tax incentives continue
to exist becomes an important one. In general, two narratives respond to
the concerns of the ongoing use of tax incentives: the first narrative states
that tax incentives are helpful to achieve economic goals such as growth,
investment and job creation. The second narrative, in contrast, argues that
tax incentives secure the power of politicians as they can seek rents by
favoring firms (Zelekha & Sharabi, 2012). Tax incentives can thus ulti-
mately lead to corruption and to a less-competitive market. Although the
present chapter cannot demonstrate the relationship between corruption
and tax incentives on a global scale, it examines the effects of tax incentives
in Guatemala, a country which exhibits a significant amount of tax incen-
tives and high levels of corruption. In a Latin American comparative per-
spective, Guatemala is a relevant case because it has one of the lowest
overall tax collection in the region and one of the highest rates
of poverty and criminality. Moreover, recent tax evasion trials against the
President and a Vice-President indicate the use of taxation for obtaining
political influence.
Based on the analysis of secondary data this chapter observes how tax
incentives have been used from 2009 to 2015 in the context of the long-
term effects of the tax policy during the last 20 years. Unfortunately, the
observational period is limited to these dates as it is the only period for
which data related to tax incentives in Guatemala exists. In addition, the
chapter analyzes the tax structure during the democratic era from 1986 to
the present date to provide the necessary background information to
understand the evolution of tax incentives in the fiscal system.
The aim of this approach is to not only describe the fiscal cost or the
total amount of tax expenditure that such incentives represent, but to
understand how tax incentives are used in Guatemala and how the
application of these mechanisms helped create a structure that benefited
TAX INCENTIVES IN LATIN AMERICA: THE CASE OF GUATEMALA 215
the exportation industry. Although the chapter concentrates on the case

of Guatemala it offers a comparative perspective to an understudied
phenomenon in taxation in Latin America.
It is important to emphasize that tax systems, and therefore tax incen-
tives, are part of the relational dimension of taxation. Taxation affects and
reflects social relations and thus its performance allows identification of
multiple individual and group dynamics in contemporary societies. This is
particularly relevant in Guatemala where the evolution of tax policy since
its independence in 1821 suggests a weak impact on reducing economic
disparities and therefore a significant role in the reproduction of inequality
(Commission for Historical Clarification, 1999). Based on this back-
ground, such an approach to tax incentives in Guatemala has to explore
not only their economic costs (e.g., how they have affected the country’s
tax burden) or the institutional features that they produce (e.g., the diffi-
culties of a transparent and rule-based fiscal policy-making), but also social
conflicts regarding the allocation of exemptions and special regimes
instead of other policy options that might have been more beneficial to the
majority in society.
With this purpose in mind the chapter is organized as follows: the sec-
ond section reviews the tax incentives literature and presents a comparison
between Guatemala and Latin America, focusing on tax incentives and the
social circumstances that surround these incentives. The third section
exemplifies the impact of tax expenditure by demonstrating the effect of
tax incentives on the tax burden in Guatemala and its tax system. In this
section, the social cost of tax expenditures are also analyzed, which leads
to the hypothesis that the proliferation of tax incentives is associated with
social development indicators in the country. The final section provides
some conclusions.
2 Perspectives on Tax Incentives

Depending on the purpose for creating tax incentives different types of this
mechanism can be distinguished. One type of tax incentive is tax holidays,
which are based on an incentive program to promote growth through
investment. This type of incentive creates—for a specific period—a non-
taxable status for companies performing a certain activity or asset, such as
exportation. There are two types of tax holidays: one in which the tax holi-
day is available to all the entities in an industry and second in which entities
have meet qualification criteria (PWC, 2013). The rationale for tax holidays
216 M. GARITA
is that companies can catch up during the non-taxable period and invest
their surplus profits to enhance productivity and competitiveness.
A second type of tax incentives are investment allowances and tax credits,
which are used to reduce the taxable income of a firm based on its expendi-
ture related to investment (IMF, 1998). Tax credits may pose a problem to
governments because of the difficulty in determining which expenses should
be included in the allowances. To determine an investment allowance, gov-
ernments usually take several factors into account, such as: (a) the eligible
investments for which the tax credit applies, (b) the amount of the credit,
and (c) the duration and restriction of the tax credit. In addition, different
ways to implement tax allowances exist. This differs from tax holidays as the
latter is applicable to a period of time, while the investment allowance is
applicable to a certain amount of expenses (Easson, 2004).
Tax incentives can also be related to a certain economic activity such as
importation and exportation of goods. The exemption of value-added tax
(VAT) and customs duties for imports and exports are commonly used
worldwide, but they are often bounded by restrictions. Usually, the restric-
tion of VAT to imports is related to raw material that is important for the
development of products in the country. In the case of exports, in devel-
oping countries the figure of an export-processing zone (EPZs) is com-
mon, creating an area that offers incentives to companies in certain
industries and a barrier-free environment for attracting foreign investment
related to export-oriented production (Papadoupoulos & Malholtra,
2007). Often, the companies included in the EPZ are tax-exempt for the
expenses of production, exportation and/or profits. In Central America,
the number of EPZs has increased significantly during the last few decades.1
There are other tax exemptions that depend on the region, but the
abovementioned are the most commonly used. The most employed
exemption, as well as the one most abused, is the tax holiday. This is espe-
cially the case within the export sector. For example, exporting companies
in Asia frequently have a tax holiday of three to ten years, with deductions
of 100% in the first years and 50% in the succeeding years. In China, tax
holidays include exemptions from the income tax up to 50% for the first
five years and 10% from the sixth to the tenth year (Asian Regional
Integration Center, 2016).
Debates surrounding the use of tax incentives confront two visions, one
that is centered on the benefits of tax incentives and a second focused on
the disadvantages. The first narrative draws on the idea that there is a
global tax competition—even tax wars—among countries in a globalized
economy. It is therefore imperative for a country to modify its tax s tructure,

including the establishment of tax incentives (Klemm, 2009), to success-
fully compete against others, even when countries are not in a similar con-
dition or have different backgrounds (Tax Justice Network, 2015).
Tax competition by means of tax incentives, however, poses important
challenges to a country’s economic development. One of these challenges
is that such competition may induce cartelization—a process in which
companies have specific benefits through restrictive practices—and ulti-
mately create market distortions (Morris & Moberg, 2012). These market
distortions end up unfavorably affecting the economy. For instance, as
Moreno-Dodson (2015) states, tax incentives have become a race to the
bottom by lowering taxes and therefore negatively affecting public invest-
ment in the long run.
The main consequence of tax competition is the lowering of rates. In
OECD countries, tax collections as a percentage of GDP were reduced
from 64.2% in 1980 to 39.8% in 2007. The highest marginal corporate tax
rate was reduced in the same period from 48% to 27% (Mitchell & Garst,
2011). Many economists at this time considered tax competition and the
reduction of tax rates as acceptable. In fact, economists and Nobel-Prize
winners such as Milton Friedman and James M. Buchanan viewed tax com-
petition as a respectable policy. Friedman advocated for a negative income
tax in 1962, arguing that it would improve the economic circumstances for
families. In the same line of thought, he believed that the competition of
taxes created sustainable regions. As stated in a letter written by Milton
Friedman and James Buchanan, to another Nobel-Prize winner, “tax com-
petition is a liberalizing force in the world economy, something that should
be celebrated rather than persecuted. It forces governments to be more
fiscally responsible lest they drive economic activity to lower tax environ-
ments” (Friedman & Buchanan, 2001: 15). Tax incentives are important
tools in such competition for the most (market) efficient tax system. Their
advantages are that they may be useful to attract investment, are easy to
implement, and promise to lead to lower prices (Easson & Zolt, 2002).
Arguments against tax incentives also are centered on the fact that they
can create a less-transparent tax system, which makes it very difficult to
predict future tax revenues and, as mentioned, can create a distortion for
investors in the long run. In addition, a reduction of the average effective
tax rate and the likely reduction of overall revenues diminishes fiscal
resources necessary for developmental policies, such as investment in edu-
cation and infrastructure (Institute of Economic Affairs, 2012a, 2012b).
218 M. GARITA
The debate between the benefits and disadvantages of tax incentives is also
focused on a country’s level of development and the strength of its tax
system and capacity for sustaining growth and development in the long-
term. Tax incentives in low-income countries have been found to be inef-
fective, inefficient and associated with corruption (OECD, 2013). In
particular, when tax incentives are set in a discretionary form then the
influence of special interests, lobbying and increased corrupt practices are
highlighted (Parys, 2013). From a social perspective, tax incentives have
been found to have a prejudicial effect, mainly because they limit the
capacity of the government to compromise the budget of public institu-
tions (Gale & Samwick, 2016).
In relation to investment, tax incentives are detrimental to investment
for the discussed distortions that they create, but investment also does not
tend to be elastic to changes in tax rates as suggested by the supporters of
tax incentives. In fact, investment tends to be sensible to non-tax factors
such as stable macroeconomic and fiscal policy, political stability, a strong
institutional infrastructure, and effective and transparent public adminis-
tration. On a societal level, factors such as a skilled labor force and culture
that are associated with government investment and development policies
are also considered important criteria for investment decisions (Zolt &
Easson, 2012).
3 Tax Incentives in Latin America

Historically, tax incentives have been principally used for the purpose of
promoting economic growth and attracting investment, as well as stimulat-
ing industrial research and development (R&D) in Europe. Currently, 26
states in the European Union and 27 OECD states provide tax incentives
for research and development (European Commission, 2014). In contrast,
in Latin America, incentives have become a common practice to promote
tax competition (Buss, 2001). According to CIAT (2015), tax incentives in
Latin America are divided into five different categories: exemptions, deduc-
tions, preferential taxes, deferrals and special tax regimes, which are the
same as in other regions. The use of tax incentives often involves several of
these categories and are directed to specific industries.
Table 8.1 shows the prevalence of tax incentives in Latin America and
the OECD as a percentage of tax laws. It demonstrates that in both regions
tax incentives are a relevant component of fiscal policy; however, important
differences become evident, especially in the case of tax holidays and R&D
Table 8.1 Prevalence of tax incentives in Latin America and OECD, as a

percentage of total countries in 2014
Region Tax holiday/Tax Reduced Investment R&D tax Free Discretionary
exemption (%) tax rate (%) allowance/ incentive zones process (%)
Tax credit (%) (%) (%)
Latin 88 32 52 12 72 40
America
and the
Caribbean
OECD 21 36 64 76 67 33
Source: Elaborated by the author based on James (2014)
tax incentives. Eighty-eight percent of the countries in Latin America have

a tax holiday exemption, while in the OECD only 21% have implemented
such measures. In the case of R&D tax incentives, 12% of Latin A merican
countries use these incentives as compared to 76% of OECD countries.
One basic problem in Latin America is that tax incentives foster unin-
tended behavior, such as decisions pertaining to company size and non-
compliance. The policy of tax incentives has guided the action of the private
sector when deciding how to handle their activities. In some cases, this has
resulted in fiscal dwarfism, that is, the company’s interest in staying small
because of the complications an increase in size brings with respect to tax
payments. For instance, in the case of Costa Rica, fiscal dwarfism was incen-
tivized by the preferential income tax and, as a result, the companies han-
dled their fiscal strategies based on the size of the company to avoid having
a higher tax burden (International Labor Organization, 2014).
Regarding tax incentives, the literature has found that tax incentives
can facilitate practices of evasion and avoidance. This is because they
reduce the tax base, are difficult to manage and monitor for tax adminis-
trations, and can be used by companies to pursue aims other than those
originally stated when accepting the incentive (Corbacho, Fretes Cibils, &
Lora, 2012; Jimenéz, Gomez Sabaini, & Podesta, 2010). Tax incentives
can promote competition between countries and may facilitate aggressive
tax planning or tax avoidance strategies, given the motivation to shift prof-
its to other countries.2
This creates a vicious circle where a weak tax administration cannot
tackle illicit financial flows nor control tax evasion, but grants tax
incentives for competition. This has a direct consequence on the tax
burden given that the tax base is eroded and profit-shifting proliferates
220 M. GARITA
(OECD, 2013). Attempting to attract investment in this way therefore

carries the consequence of diminishing the tax burden and affecting
the capability of the tax administrators to fulfill their duty. To measure
the consequences of tax incentives, the concept of “tax expenditures”
can be used, which reflects the lost potential tax revenue due to tax
incentives. It is calculated by estimating the potential revenue for each
tax and subtracting the existing revenue. Tax expenditure thus mea-
sures the impact of exemptions, deductions, credits, reduced fees and
deferments on aggregate. The concept of tax expenditures began in the
1960s in the United States and Germany and aimed to normalize the
tax incentives data to enable cross-country comparisons.3 Tax expense
is revenue that the country resigns to tax (Villela, 2011). Table 8.2
shows, based on calculations made by Villela, Lemgruber, and Jorrat
(2009) and Villela (2011), the total amount of tax expenditures—as a
percentage of GDP—in seven Latin American countries for the decade
2000–2010.
According to this data, tax expenditures have been increasing in impor-
tance since the turn of the century in almost all seven countries. Most
importantly, in countries where the tax regime is already deficient and
inefficient, and the capacity of the tax agency is weak—such as Guatemala—
tax expenditure is significantly higher than in countries with more-
developed regimes, such as Argentina and Brazil. Overall, these numbers
make clear that tax incentives significantly reduce the tax collection and
consequently distort regional tax systems. This has created an important
gap, given the expenditure needs of Latin American countries. As Gomez
Sabaini et al. (2017) stated, tax incentives in the region have been elabo-
rated without any legitimate rationality and purpose. They have had an
important consequence in the sacrifice of tax resources without any influ-
ence on growth and investment.
4 Tax Exemptions and Their Effects in Guatemala

Guatemala is the country with the lowest tax burden in Latin America in
2014 (13% of GDP). In contrast Brazil, the country with the highest tax
revenue in the region, collects almost three times as much revenue, 36% of
GDP (ECLAC, 2015a, 2015b). This simple comparison reflects the abys-
mal difference between Latin American tax systems, as well as the notable
differences in the ability of states to extract tax revenues and their capacity
for constructing more-equitable societies. In comparison to Latin America
Table 8.2 Tax expenditures in seven Latin American countries, as percentage of GDP, 2000–2010
Country 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Av.
Argentina – 3.01 2.71 2.41 2.01 2.21 2.11 2.2 2.14 2.08 – 2.32
Brazil 1.58 1.51 1.78 1.7 1.7 1.69 1.99 2.29 2.77 3.2 4.03 2.20
Chile – 4.43 4.22 3.87 3.45 4.38 4.05 4.88 3.96 3.96 – 4.13
Colombia – – – – – 3.7 3.96 3.52 – – – 3.73
Guatemala 12 12.7 12.7 12.3 8.4 8.4 8.5 8.6 – – – 10.45
Mexico – 5.26 5.26 5.28 6.32 6.32 5.59 5.38 – – 4.47 5.49
Peru – – – 1.83 2.07 2.07 2.24 2.22 2.05 1.81 – 2.04
Source: Author’s elaboration supported by data from Villela et al. (2009) and Villela (2011)
TAX INCENTIVES IN LATIN AMERICA: THE CASE OF GUATEMALA
221
222 M. GARITA
as a whole, Guatemala is extremely regressive, not only in terms of tax

revenue collection but also in terms of institutional stability, state capacity
and social indicators in education and health. Given this reality, tax incen-
tives exemplify the barriers to achieving a fair tax system, a more redis-
tributive fiscal policy and a more effective role for the state in tackling
important social issues and risks.
The democratic era in Guatemala began comparatively late in 1986, as
did the open discussion about tax administration and tax laws. This discus-
sion finally started with the necessity for tax reform to tackle the inherited
fiscal deficit of the authoritarian regimes. Vinicio Cerezo, the first elected
president in the democratic period, tried to implement new taxes but was
confronted with a powerful and influential business sector that was able to
delay the implementation of new taxes. Ultimately, reform was approved
in the last months of Cerezo’s government, but only with important
changes. Some taxes, however, were introduced before the democratic
era. The income tax, for instance, was established during the Civil War by
President Miguel Ydígoras Fuentes in 1962. Not only was its introduction
substantially late by Latin American standards (see Biehl and Labarca in
this volume), it was also the least-modified tax in the country. In fact, after
its introduction the tax remained untouched until 2004, when President
Berger made certain modifications, such as the increase of tax rates
(Instituto Centroamericano de Estudios Fiscales, 2007).
The introduction of major indirect taxes was also comparatively late by
Latin American standards. The VAT, the most important indirect tax in
the country, was approved by Dictator Efraín Ríos Montt only a year
before the democratic era, setting the tax rate at 10% (Cifuentes, 2007).
This decree also specified important tax exemptions for the VAT: universi-
ties, government bodies, specific individual and juridical persons under a
temporary regime, associations and institutions that provided assistance to
education centers were exempt from paying VAT. These exemptions have
not been modified and still apply today (Gobierno de la República de
Guatemala, 1987). In addition, Mejía Víctores, the president who fol-
lowed the coup d’état of Ríos Montt, reduced the VAT to 7%, additionally
reducing the fiscal capacity of the Guatemalan state.
Democracy did not mean a progressive evolution of the tax system in
Guatemala. Tax reform proposals often ended due to the successful lobby-
ing of the private sector and the veto in Congress. As an example, President
Álvaro Arzú made an agreement with the International Monetary Fund
(IMF) in 1996 to increase the tax burden to 8.5% of GDP within four
years. Against this background, President Arzú attempted taxing the

private sector and concentrated capital. Surrounded by great controversy,
the government finally established a tax on property but granted exemp-
tions to properties which fell within a defined value (below 20.000
Guatemalan Quetzals) and gave the landowners responsibility for calculat-
ing the value of their own property (Gobierno de la República de
Guatemala, 1998). This process of self-valuation did not evolve as expected
and became a path to tax evasion.
In Guatemala, tax administration and collection used to be based in the
Ministry of Finance. This created a problem when exercising decisions as
they could be easily influenced by the President, but could also be guided
in a certain way depending on his affinity toward certain business sectors.
President Arzú finally created the contemporary Tax Administration (SAT)
with the Decree 1–98 and established an independent institution respon-
sible for tax administration and collection. The last effort of the Arzú
government to increase tax collection was the Fiscal Pact, which was
approved in 2000. The Fiscal Pact aimed to increase the tax burden to
12% of GDP by 2002 and to create a progressive tax system. The pact also
stated that the fiscal deficit target should be maintained at 1% of GDP and
that public investment should be less than 4% (Ministerio de Finanzas de
Guatemala, 2000).
After the pact, President Alfonso Portillo took office and, in accordance
with the strategy of the Fiscal Pact, raised the VAT rate to 12%. This con-
curred with the process of elevating the tax burden but at the cost of the
progressivity of the tax system. All tax increases were due to the VAT, which
has the regressive effect of income inequality. In contrast, income tax,
which is more progressive, has remained unchanged despite discussion of
vertical equity in most reform proposals. Nor did the Fiscal Pact have a
strong positive effect on the tax income, from the approval of the tax to
2004 Guatemala’s tax burden increased by only 0.3% (Fuentes-Knight &
Cabrera, 2005). The reason for this minimal effect is that tax evasion
remains high and high levels of informality compromise the tax base.
Few other changes were made to increase tax burden and instead a law
for tax exemptions was introduced. From 1980 to 2012 for every
Guatemalan quetzal of production only 0.09 were related to the payment
of taxes, and during this period there were nine attempts for a fiscal reform
that were unsuccessful (Barrientos, 2015). The reason for the failure of tax
reforms in 2012 was the well-articulated strategy of the business sector.
According to Herrarte (2012), the CACIF (Comité Coordinador de
224 M. GARITA
Asociaciones Agrícolas Comerciales, Industriales y Financieras) was able to

manipulate the tax reform proposal, given its success in influencing gov-
ernment more than any other business group or political party. As Berganza
(2016) stated, in the process of a new tax reform in 2016, although the
CACIF was weakened by an internal division, the organization was able to
delay the reform discussion, ultimately ending the reform process. As
Gutiérrez (2016) indicated in a study by Insight Crime, CACIF is the
political party, the mediator, the public image and the political influence of
the Guatemalan elites.
The recent history of tax expenditure in Guatemala is better understood
from a legal point of view, given that two main laws have been the cause of
most tax incentives in recent years. In 1989, the Decree 29–89 was
approved with its purpose being to give privileges to the export industry.
As a consequence, the law granted important exemptions to the national
export sector that included temporary suspensions of tariffs and taxes on
imports, total exemption of the income tax for everything assembled in
Guatemala, temporary suspension of taxes or tariff from every product that
is imported and used in the production of goods, and a total exemption of
tariff and VAT on the machinery and parts needed for the production of
exportations. In Article 13, the law also specifies a reimbursement for the
income tax paid on the products exported outside Central America on the
condition that the product is manufactured in Guatemala. This decree, also
known as law of maquilas, allowed companies such as mining, call centers
and bottling companies to be exempt, violating the purpose of the law
which was originally meant to support the textile industry (Gramajo &
Ramirez, 2016). The law established tax holidays—temporary periods for
ten years for the exemptions—for the companies in question; however,
companies soon changed their names to use the exemptions after the
exemption expired.
In 2016, a new law was passed (Decree 19–2016) which was titled as
an “emergency law for job creation”. This law expanded the reimburse-
ment of the income tax in Article 13 and modified the Decree 29–89 so
that the products acquired locally were also exempt from paying VAT. The
effect of this modification is extremely important given that 47 mega-
companies are registered in this law and of these listed companies, 19 are
government providers (Olmstead, 2015). This fact is not only relevant
because it highlights common practices of corporate lobbying in the coun-
try, but it also sheds light on the dominant low tax morale. Companies
benefiting from government spending as contractors for government
services are granted tax exemptions, thus they do not contribute to the
government financing.
The Decree 29–89 and the 65–89, which created free trade zones,
resulted in an average tax expenditure from 2009 to 2015 of 4.7% of
GDP. In the same period, the average tax collection reached only 11%.
During the last few years, however, tax expenditures have been reduced
such that in 2009, the tax expenditure was 5.9% of GDP while in 2015 it
was 2.5%. The reduction of tax expenditures came from a modification in
the regime for the workers’ personal income tax. As shown in Table 8.3,
71.2% of the tax expenditure in 2012 was due to exemptions in income tax;
after modification in 2013, this participation was reduced to 26.74%. From
2013 to 2015, the lion’s share of tax expenditures came from VAT, which
amounted to 58.10% of the total tax expenditures (SAT, 2015) (Table 8.3).
Although the tax expenditure for 2015 was calculated at 2.5% of GDP,
it is still a common practice that has a negative effect on the tax burden.
A low tax burden is perhaps one of the most permanent problems of the
Guatemalan economy. In fact, despite the changes in the Guatemalan tax
system undertaken in the latest years—three tax modifications in 2013,
2014 and 2015 and one tax reform intent in 2012. Since 2010—the tax
burden is still lower than it was agreed in the Fiscal Pact (12% of GDP)
and has fallen significantly in the last three years (Arenas de Mesa, 2017).
While in 2013 the total tax collection was 11.46% of GDP in 2016 this
value had dropped to 10.82% (SAT, 2017).
Today, the tax-exempt population in Guatemala includes 30,876 tax-
payers. From these exempt taxpayers there are 272 banks, 1638 coopera-
tives, 6430 schools, 118 universities, 2816 religious institutions, and 52
business chambers also exempt from income tax (SAT, 2015). This also
includes VAT exemptions that were included since the law was approved
by Dictator Ríos Montt.
Table 8.3 Tax expenditure by tax as percentage of total exempted in Guatemala,

2009–2015
Year 2009 2010 2011 2012 2013 2014 2015
Income tax 71.7 71.7 71.0 71.2 26.7 25.6 30.3

Solidarity tax 4.3 3.9 4.1 3.5 7.9 7.6 6.8
Value-added tax 22.2 22.5 22.9 23.6 61.1 63.8 60.2
Source: Elaborated by the author with information from (SAT, 2015)

226 M. GARITA
Given this persistent low level of taxation, the high level of tax
e xpenditure is difficult to justify. Arguments that stress the potential of tax
incentives to foster private investment also seem to be unfounded.
According to the World Economic Forum (2016) the most important
challenges to alter investment decisions in Guatemala are crime and theft,
corruption and inadequate supply of infrastructure. The tax burden in
contrast, is named in the 13th position as one of the 16 factors driving
investment. In fact, the effect of tax incentives in Guatemala to spur
private investment as a way to increase economic growth is difficult to
comprehend. This is especially so if one takes into account that, since
2007, Guatemala has grown at a rate of between 0.5% and 4%, and its
projected growth for 2020 is 4% (International Monetary Fund, 2016).
Furthermore, the results of tax exemptions in terms of job creation are
not easy to observe. The Instituto Centroamericano de Estudios Fiscales
(ICEFI) has made several requests to the Minister of Economy asking him
to demonstrate the amount of jobs created, for example, by the Decree
29–89. The Ministry, however, has never responded to these requests.
Tax expenditures also diminish the potential to tackle the persistent
high income inequalities in the country as they decrease the progressivity
of the tax system. Given that the income of the highest 40% of the popu-
lation is equivalent to 74% of the country’s total income, the importance
of a progressive tax structure and a fairer tax system is evident (World
Bank, 2014).
Reduction of tax incentives and a fairer tax structure could also help
Guatemala tackle corruption problems and make an alternative use of fis-
cal resources to face social issues such as education, poverty and health.
Corruption in Guatemala has been a major issue given that during
2012–2015, President Otto Perez Molina; the former Vice-President,
Roxanna Baldetti; and the former ministers of defense and governance
were on trial, based on a structure that was created to deviate income from
customs.4 The case, called La Linea, is notorious and demonstrates how
corruption is related to the political arena and how taxation can be used as
an instrument to mismanage or divert fiscal resources.
According to the Instituto Centroamericano de Estudios Fiscales
(2015) the ministers and secretaries vulnerable to corruption in the
public administration are those related to economic sectors of food,
printing (often associated with the communication strategy of the
Government), fuels, fertilizers, pharmaceutical products, medical utilities,
military equipment and leases. In the tax system this has been mainly
manifested in the creation of fake companies to create invoices to avoid
the VAT or by using tax havens to lower income tax payments and avoid
paying tax debt. For example, during 2016, the SAT recuperated an
amount of Q782.9 million (US$ 91 million approx.) of unpaid tax duties
from Aceros de Guatemala (a steel company) during an intervention.
It is evident that tax incentives have reduced the tax burden; increased
the public administration costs; and limited state capacity to implement a
more active social, educational and health policy (CEDEFOP, 2015). A
question that usually arises is: how did Guatemala, a country with the low-
est tax burden in Latin America and with a high level of social demands
and precarious social indicators end up with such a level of tax incentives
that further weakens the country’s capacity to tackle its problems? From a
relational perspective on taxation (see Atria et al. in this volume), the main
characteristics of a tax system, including its high number of tax incentives,
serve as one of the principal lenses for observing society and enable us to
understand the prevalence of dominant groups.
In the particular case of Guatemala, the veto executed by the CACIF
has been fundamental to understanding the existence of high levels of
incentives. In addition, CACIF has played a relevant role in understanding
the permanent low tax burden of the country. As stated by Fuentes-Knight
and Cabrera (2005), in every reform there has been an actor which
impeded significant change. This actor has always been the business sec-
tor, through the CACIF. Barrientos (2015) stated that the private sector
used the Constitution and legal methods to influence the reforms to reach
and stabilize a low tax burden.
5 Conclusions
The tangible results of tax incentives in Guatemala are rather disappoint-
ing compared to the theory that argues for their introduction. Tax incen-
tives do not support the attraction of investment and are hardly linked to
economic growth, given the weak economic activity in Guatemala.
However, the costs of these incentives are high, especially if tax expendi-
tures are calculated. The high tax expenditures demonstrate that the tax
burden in Latin America and Guatemala could be, without tax exemp-
tions, considerably higher, resulting in better economic and social devel-
opment indicators.
228 M. GARITA
The most important question that is left regarding tax incentives is: Are
they necessary? In Guatemala, the answer can be seen from two angles: the
first has to focus on the country’s necessities. Considering the precarious
situation of education, malnutrition, health, poverty and income distribu-
tion in Guatemala the establishment of a tax incentive policy in the coun-
try is unfounded.
The second part of the answer should focus on the organizational
effects of tax incentives. In Guatemala, the strength of the tax collection
agency, SAT, is not sufficient to supervise a tax system with a complicated
tax code and multiple tax incentives. This fragile institutional capacity,
coupled with high levels of informality and corruption, has led to major
cases of political corruption in which tax evasion was one principal source
of illicit enrichment. This demonstrates the risks of having high levels of
tax incentives and suggests that the sacrifice of such tax incentives is greater
than their returns. Ultimately, tax incentives negatively affect the economy
and, given the resulting lack of fiscal state capacity, the consequences are
mostly felt by the most vulnerable populations.
Finally, this chapter implies that the proliferation of tax incentives,
together with the low tax burden, at the same time reflect and are explained
by the prevalence of dominant groups. In the particular case of Guatemala,
the successfully lobbying by the most salient business group, CACIF, is
relevant for understanding both the existence of high incentives and the
extraordinarily low levels of taxation in the country. This is especially
destructive as the social and economic situation in Guatemala requires the
state to assume a more active role in achieving sustainable development.
Notes
1. In 1998, North America had 320 EPZs, Asia had 225, the Caribbean 51
and Central America 41 (ILO, 1998). In 2015, Asia had more than 900,
Central America and Mexico had 155, the United States 713 and the
Caribbean Region 400. The current total of EPZs in the world is more than
3500 (Ahn, 2017).
2. According to ECLAC (2015a, 2015b) VAT evasion in Latin America has
ranged from 17.8% to 37% of total potential VAT collection, compared to
3–22% in OECD countries. This demonstrates an important difference in
terms of a more transparent tax system. Concerning corporate income tax
evasion, the range is 46–49% of total receipts in Latin American countries.
This also reflects the challenge to tackle high rates of transnational illicit flows.
GFI (2013) estimated that approximately US$ 1.1 trillion left developing
countries via illicit financial flows. According to the OECD (2014) illicit
flows remain a problem because of a weak tax administration, low tax
morale, corruption, poor governance and hard to tax sectors.
3. The tax expense methodology is criticized because it does not determine the
potential benefits.
4. The tax evasion case known as “La Linea” has been one of the most polemic
fiscal cases in the history of Guatemala. The tax evasion in customs began
with the government of the Partido Patriota led by President Otto Perez
Molina and Vice-President Roxanna Baldetti. With the support of the pri-
vate secretary of the government, Juan Carlos Monzón, they managed to
obtain control over the tax administration. By controlling the tax adminis-
tration, they managed the importation and exportation of products and
enacted a smuggling scheme. Although the case is still on trial, the informa-
tion regarding the structure is becoming more transparent and demon-
strates that more ministers and governors were involved.
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Policy Implications. International Journal of Economic Sciences, 1, 138–159.
CHAPTER 9
Latin American Taxation from a New

Perspective: Contributions from the Relational,
Historical, and Transnational Dimensions
Jorge Atria, Constantin Groll,
and Maria Fernanda Valdés
1 Introduction: The Potential

of a Multidimensional Perspective of Taxation
Several aspects can influence tax regimes. Following Campbell (1993),

changes in tax regimes are conditioned by factors such as economic condi-
tions and geopolitical or fiscal crises, but also the institutional structure of
the state, the organizational strength of social classes and interest groups,
ideological differences, and the system of political representation (regime
Jorge Atria’s research for this chapter was supported by the Chilean Sciences
and Technology National Council under the Grant number 3160705, and
Centre for Social Conflict and Cohesion Studies (Conicyt/Fondap/15130009).
J. Atria (*)
Pontificia Universidad Católica de Chile (Chile) & Centre for Social
Conflict and Cohesion Studies (COES), Santiago, Chile
C. Groll
Freie Universität Berlin, Berlin, Germany
M.F. Valdés
Friedrich Ebert Stiftung, Bogotá, Colombia

DOI 10.1007/978-3-319-60119-9_9
236 J. ATRIA ET AL.
type) a country has. For each of these factors, a remarkable amount of

literature has been developed for Latin American cases and beyond. Thus,
given all the existent research on the factors determining taxation, the
question arises what can a new perspective on taxation, highlighting the
relational, transnational, and historical dimensions of taxation, contribute
to our existing understanding of the challenges in the tax regimes in the
subcontinent?
The objective of this chapter is precisely to demonstrate the utility of
this approach to extend our understanding of taxation in Latin America,
but also to illuminate on policy options and initiatives. To accomplish this
objective, this chapter is organized as follows: first, the main purposes of
this book’s perspective and its implications are recalled and clarified.
Second, the relationship between taxation and five important challenges
to Latin American development—volatility, citizenship, the role of elites,
inequality, and fairness—are outlined. This discussion recalls the contribu-
tions made by the chapters, but also highlights practical results and areas
where further research is needed. Finally, a concluding section summarizes
these findings and sketches ways ahead.
As it is evident throughout this book, the tax situation in Latin America
is complex and perplexing. Even after almost one decade of exceptional
economic growth during the commodity boom, great challenges remain in
Latin American tax regimes. Given the moment of uncertainty the region
is facing today, a comprehensive understanding of taxation appears more
necessary than ever. This can help formulate policy advice and foster taxa-
tion to better confront the economic, social, and global challenges ahead.
The situation of tax regimes in the region is also puzzling as research on
tax matters is voluminous and diverse. However, albeit the tremendous
amount of publications, statements, policy guidelines, or reports on the
topic, tax regimes in the region remain fragile, deficient, and volatile,
highlighting that research is still struggling to grasp taxation entirely. This
book is therefore proposed to study taxation within three dimensions—a
relational, historical, and transnational—with the aim to understand the
complexity of taxation and its embeddedness in its social, political, eco-
nomic, and global contexts. Each dimension on its own provides important
additional insights to already existing research as the chapters in this book
started to show.
For instance, exploring the historical dimension of taxation enables to
encounter the long durée of tax institutions and the importance of path-
dependent effects, which continue to shape tax regimes in Latin America
till the present day. Studies in this dimension focus on the constellations
LATIN AMERICAN TAXATION FROM A NEW PERSPECTIVE... 237
which impeded the implementation of income taxes or the impact of

recurrent moments of uncertainty in Latin American tax systems and can
provide valuable guidance to avoid repeating failures in tax policy commit-
ted in the past.
The relational dimension helps understand and analyze taxation, in line
with classic contributions in fiscal sociology, as a relational concept and tax
systems as a function of a strategic nexus between the state and the society.
Studies in this dimension stress the potential of taxation to change and
transform societies and social relations. As taxation is relational, this also
works the other way around. Via the exploration of the conflicts, bargain-
ing process, and social hierarchies, taxation can be better explained and
policy changes can be assessed.
Finally, the transnational dimension of taxation concentrates on the
interrelationship between changing global processes and domestic dynam-
ics in tax systems. Contributions in this dimension aim to avoid “non-
spatial thinking” in a world of increasing economic interdependence and
present insights of the impact of the intersection of Latin American econo-
mies in the global market or the influence of global capital markets in
shaping tax systems.
An analysis of the book’s contributions makes evident that the pro-
posed three-dimensional perspective offers three other relevant advantages
compared with conventional approaches to taxation. First, existing
research so far has concentrated in various frequently separated scientific
disciplines, and important insights in different fields have been neglected
by others. In addition, the ways in which research is conducted often hin-
ders the communication among the scientific fields. For example, the
dominant research in economics or political science increasingly tends to
produce formalized, context-neutral models in which history appears as a
linear process and regional particularities as well as global processes are
marginalized.1 Scholars in history and partly sociology, on the other hand
have aimed to provide close descriptions of few or single cases hardly rep-
resentative for wider inference. The perspective proposed here aims to
overcome this division and combines the insights of different schools of
thought. This is also the reason why this book compiles contributions by
authors from several disciplines from the social sciences—economics,
sociology, and political science.
Second, research that thoughtfully analyzes the relational, historical, and
transnational dimensions of taxation is still an exception in Latin America.
Frequently, tax policy advice is given based on generalized arguments and
238 J. ATRIA ET AL.
a non-attention of contextual factors. Other research, highlighting these

dimensions frequently remains descriptive and lacks to inform policy mak-
ers in concrete circumstances. However, in the light of moments of uncer-
tainty, such as Latin America is experiencing today, research on taxation
should be context sensitive but also aim to have practical relevance.
Therefore, the aim of this book was to unite research for a different set of
specific questions surrounding tax systems in Latin America which fulfill
this quest.
Finally, the chapters presented in this book are a first step in the explo-
ration of tax systems within this perspective, and regardless of the several
lessons for specific aspects of tax system dynamics they provide—for exam-
ple, the taxation of extractive industries, the political economy of income
tax or tax exemptions—they also shed new light on five major challenges
highly relevant for Latin American development which are connected to
taxation. In particular, the synthesized result of these works make a sub-
stantial contribution to understand the relationship between taxation and
important issues such as volatility, citizenship, elites, inequality, and fairness.
2 Challenges to Latin American Development

Through the Lenses of Taxation
The contributions in this book expanded our understanding on important
challenges to Latin American development. Certainly, all these topics
deserve a more encompassing academic attention, but the chapters in
this book show that the application of a multidimensional perspective
on taxation—which includes relational, transnational, and historical
dimensions—can enrich our understanding of taxation as well as the rela-
tion between taxation and these topics and ultimately generate concrete
guidelines for public policy.
2.1 Economic Volatility and Taxation

As was clearly shown in Gómez-Sabaini and coauthors in this volume, the
Latin American region has suffered significantly higher macroeconomic
volatility and more crisis periods than any other region in the world.
Growth phases have tended to be relatively short lived, often ending in
deep economic crises and instability (CEPAL, 2010; Gavin & Perotti,
1997). This trait is considered by some economic historians as the most
salient and persistent economic characteristic of the region and frequently

as the very reason why it is possible to speak of Latin America as an analyti-
cal unit (Bértola & Ocampo, 2013).
The reasons behind this situation are associated with the particular
insertion of regional economies in international markets, their production
and institutional structure largely a result of the colonial heritage (Blumer,
2003; Coatsworth, 1990), accidental aspects such as the habitual occur-
rence of natural disasters, but also policy choices such as frequent procycli-
cal economic policies. The consequences of this volatility tend to be
profound; Gomez-Sabaini et al.’s chapter shows how macroeconomic
volatility perpetuates the poor economic performance of the region.
Another likewise important consequence is its effect on inequality: volatil-
ity and crises episodes are considered both a source and a reproducer of
inequality in the region and elsewhere (Atkinson & Morelli, 2011;
Calderón & Levy-Yeyati, 2009; Hausmann & Gavin, 1996).
For the interest of this book, a relevant consequence associated with
these high levels of volatility is its effect in terms of fiscal sustainability,
understood as the capacity of the state to finance its obligations over time
(Arenas de Mesa, 2016). Volatility of economic output is related to volatil-
ity of tax revenues and unstable and unpredictable fiscal revenues, which
put fiscal sustainability at stake.
The reasons why volatility of output is so easily transformed into reve-
nue volatility in the region are clear in the literature: a high dependence of
the economy from fiscal revenues derived from—or highly correlated to—
commodity markets is the foundation of vulnerability (see Gómez Sabaíni
et al. in this book). While it is easy to see why Latin American tax systems
are vulnerable to volatility, putting fiscal sustainability at risk, it is not easy
to understand why, a region so widespread with crises, with all the costs
and consequences that it implies, has not been able to construct a tax sys-
tem that is better equipped to deal with these circumstances and even
mitigate economic turbulences. That is, a more robust tax system with a
stronger income tax on individuals, the classical revenue stabilizer of the
Keynesian economic theory. Looking at international experiences, the
situation looks even more perplexing, since it is precisely after moments of
fiscal difficulties, such as those derived from the financial needs of war and
financial sustainability concerns, that countries, particularly in the north,
have built robust tax states.
The reasons behind this “paradox” are certainly complex, but the
approach proposed in this book to study Latin American taxation can give
240 J. ATRIA ET AL.
important insights. One of the principal insights comes from looking into
the historical perspective and has to do with the relevant role that the pat-
tern of international insertion has on the tax configuration. Volatility and
fiscal sustainability threats may not translate into more robust taxation
because certain patterns of international insertion may not require or may
not allow a robust taxation to take place. Schneider, for instance, studying
the recent history of Brazil, clearly shows that, different patterns of inter-
national insertions require a different set of state capacities. The state
capacities involved in an import substitution industrialization type of
insertion into global markets are different from the capacities needed for
competition in a liberalized global political economy. Some modes of
insertion require more of a robust and progressive tax system than others.
Although, as he noticeably evidences, the fact that the mode of insertion
requires a more robust tax system is not a guarantee that it will develop.
Particularly, he states that, for the case of Brazil, it was necessary that coin-
cident reforms take place—that is, when a parallel overhaul of federal as
well as tax institutions occurred—to make a robust tax system materialize.
Applying a similar effective mix of the historical and relational dimen-
sions of taxation, Saylor shows that this translation may not exist given
that patterns of international insertion may not allow a robust taxation
taking place. Looking at the War of the Triple Alliance of the nineteenth
century, he shows that one of the reasons behind why fiscal sustainability
threats—driven by war and the preparation for war—did not end up in a
robust tax state in Brazil and Argentina, was because the same economic
factors that caused the high volatility in the first place, namely, the region’s
place within the global hierarchy characterized by the supply of natural
resources and lack of access to international credit, created political
coalitions of net debtors that did not regard building tax capacity to be in
their self-interest, thus never advocated for a strong tax system, impeding
its development. This underlines the importance that the political and
social configurations in hierarchical societies, namely the formation of rul-
ing coalitions, have over the long run for economic development and in
particular for taxation (Centeno & Ferraro, 2013).
The importance of international factors in explaining the puzzle is fur-
ther emphasized from the transnational perspective. Gomez-Sabaini et al.
show that it could be the case that countries do not strengthen their tax
systems, not only because their mode of insertion into global economies
do not ask them to, or do not create the political atmosphere that favors
robust taxation, but also because it may not be necessary to engage in the
exhausting bargaining processes with economic or political elites to create
or reinforce existing taxes. The mode of international insertion, which

relies heavily on the exploitation of nonrenewable resources, makes it
unnecessary to strengthen the tax system, particularly in good times, when
the availability of commodity-based fiscal income raises the political cost of
collecting traditional taxes and politicians may opt to reduce traditional
tax rates as a way of distributing rents. In fact, their chapter evidences how
in latest years most efforts in the region have been to increase revenues
from natural resources.
Some chapters of this book uncovered possible reasons for weak tax
institutions in the region despite existing catalysts which in other latitudes
have resulted in strong tax institutions such as war and economic difficul-
ties. The challenge that is faced in both research and practice is this: once
we partially understand why regional economies do not resort to strong
tax systems to both tackle and confront regional boom-and-bust cycles,
how to make the turning point toward a more robust taxation. Since most
of the reasons are associated to the economic insertion of regional econo-
mies, a reflection on the real possibilities of change that exist is necessary.
Such a quest for further research is especially relevant given the global
governance of global trade which affects taxation. For example, little
research has yet explored the political economy of the relationship between
taxation and the “international investment regime” (Alvarez & Sauvant,
2011), which most Latin American governments have committed to in
order to attract foreign investment. The rise of free trade, culminating in
multiple and ever more Free Trade Agreements signed by Latin American
governments resulted not only in the dismantling of trade taxes but also
had a recurrent impact in the wider characteristics of tax regimes, such as
the tax mix, tax rates, exemptions, and legislation. In his chapter, Garita
reminds us about one of these effects of export-led integration via free
trade in Guatemala. A great part of the tax incentives he describes is due
to the establishment of free trade zones, where companies are exempt of
tax duties, compromising the overall revenue collection. Such a policy not
only compromises long-term fiscal sustainability but also has led to poor
results in terms of social and human development.
2.2 Citizenship and Taxation
The historical, relational, and transnational perspective on taxation
exposed in this book also contributes to our understanding of the link
between taxation and citizenship. Citizenship regimes—the way in which
persons are recognized as legitimate political actors, bearers of rights and
242 J. ATRIA ET AL.
responsibilities before the state, and able to use stable mechanism of par-
ticipation in the public and political processes (Collier & Collier, 1991)—
can be further explored if taxation is analyzed. In this sense, tax analysis
can expose who has political membership, the kind of rights individual
persons (or groups) possess, and how the mediation of interest with the
state is structured—the three critical empirical questions to assess citizen-
ship (Yashar, 2004). Citizenship regimes can vary within these three
characteristics—for example, resulting in liberal, pluralist, or multicultural
approaches to citizenship (Isin & Nyers, 2014)—in theory and practice
and analyzing taxation may not be the most common approach to deter-
mine these characteristics. Still, tax analysis can provide an additional
perspective on critical state–citizen relationships and help understand

dynamics in citizenship regimes.
Tax regime analysis, afar from representing simple numbers, indicate
the state’s capacity to extract resources, its legitimacy, and the dynamics of
intersubjective recognition among citizens in a polity. Analyzing and
understanding these three characteristics of taxation are useful to under-
stand all three aspects of citizenship regimes. Tax capacity, the degree to
which a state can extract resources from its citizens, enables us to observe
not only the coercive power of the state but also which linkages exist
between the state and individuals or groups, thus allowing to infer which
forms of interest mediation are dominant and which are not. Taxation also
shows which degree of state legitimacy exists within the society and deter-
mined groups, as coercion alone is not sufficient to guarantee tax compli-
ance. “Quasi-voluntary compliance” (Levi, 1988)—voluntary compliance
in the shadow of coercion—has to be established and, as the fiscal contrac-
tual school proposes, has to be negotiated with dominant groups in the
society. Again, based on levels of compliance and the characteristics of the
tax system, the exclusive rights and intermediation are made visible.
However, trading taxes for services, benefits, or obligations, such as
the fiscal contract model proposes (Timmons, 2005), obscure important
pillars of the tax system. These pillars have to do with recognition and soli-
darity. Latin American states are, as Biehl and Labarca in this volume
rightly assess, “only legitimate when they spend and not when they tax”.
This is correct but the legitimation also rests on citizens’ beliefs in the
image of the states transcendent authority and credibility. Such an image,
however, is dependent on the ability of the state to offer citizens moral
recognition in reward for their generosity of the collective (Mauss,
1990). Their generosity—in the form of tax payments—hinges on two
points: the feeling of identification with the collective to which they seek
membership via payment (Abelin, 2012) and the level of mutual trust
and intersubjective recognition among citizens in the society.
Recent governments in Latin America have indeed, aimed to revitalize
the fiscal bond via politics that aimed to restore an image of authority and
credibility, especially within former marginalized groups, increasing social
spending or redefining citizenship regimes via the granting of new rights
or the inclusion of identity groups—such as in Bolivia, Ecuador, Argentina,
or Brazil. Some authors have argued that this strengthened the fiscal con-
tract in the region (Bird & Zolt, 2015). The chapters in this book, how-
ever suggest that the progress of enhancing intersubjective trust and
recognition, particularly between the elite and the marginalized groups,
remains opaque and, more importantly, given the persistent high rates of
evasion and avoidance, as well as multiple forms of exemptions, as, for
example, highlighted by Garita and Castañeda in this book, it seems
unlikely that the state increased its authority and credibility versus the top
income groups and economic elites.
The chapters in this book make further contributions that shed light on
the dynamics of citizenship regimes in the region, highlighting particular
forms of effective political membership, interest mediation, and the per-
petuation of exclusive and particular rights and privileges in the realm of
taxation. For example, the contribution by Rodríguez and Águila suggest
forms of gender-based indirect discrimination in taxation, which even sur-
vived a self-proclaimed progressive government in Argentina, indicating
unequal treatments of formally equal citizens. Privilege and exemptions in
the tax code are also stressed in the work of Garita and Castañeda. These
authors remind us that, even after the tide of leftist governments in Latin
America, neo-liberal economic discourses are still a powerful tool to legiti-
mize such discrimination in taxation.
Most authors in this book relate the instable and partial fiscal pacts in
Latin American tax systems to the forms of interest mediation or some-
times imposition in Latin American countries. They show, as, for example,
Saylor and Schneider do in their chapters, that tax policy largely has been
an “elite affaire”, dependent on the fragile and temporal agreements among
competing elites. Thanks to the transnational perspective they apply they
can additionally show that such arrangements are always dependent on the
current form of a country’s intersection into the global economy, which is
the principal motor shaping an actor’s interests and positions. In terms of
citizenship, they provide an additional view on the illiberal Latin American
244 J. ATRIA ET AL.
societies of the early twentieth century. The chapters by Castañeda, and to

a lesser extent Garita, suggest that such exclusive mediation of interest
hasn’t changed much in times of representative democracy. Although
Castañeda stresses that tax reforms in Colombia are frequent, meaning that
popular elected representatives respond to the needs of increasing public
revenue, reforms remain partial and powerful groups can prevent them-
selves from being taxed too heavily, thus rendering the entire tax system
inefficient, unfair, and unsustainable. Although other country experiences
contend that modest progressive tax reform is possible, research shows that
elite influence can only be ruled out by mobilizing significant public sup-
port (Fairfield, 2013). Thus, progressive tax policy appears to require simi-
lar levels of engagements of civil society movements as do struggles for
social and civil rights—core demands for citizenship—do, to be brought
forward in Latin America. For civil society groups, this means that taxation
has to be viewed from the point of rights and justice, rather than a form of
public accounting.
Stable fiscal contracts, however, will be sustainable only if the state is
perceived as a legitimate and credible authority. Yet, the contributions in
this book, which also the data on high levels of tax evasion and avoidance
underline (see Atria et al., this volume), suggest that this is far from being
the case in Latin America. In addition, as Biehl and Labarca in their con-
tributions mention, the class character of the income tax in Latin America,
highlights the lack of intersubjective recognition and the deficiency of a
generalized identification with the collective. Two conditions, as men-
tioned above, for the legitimacy of the state. Given their absence, as both
authors show the success of the income tax was short lived.
In terms of citizenship, one can also deduct from the text of Biehl and
Labarca the principal paradox for progressive tax policy: because the state
is caused by a privation of public resources unable to finance and secure
basic social rights, in other words fulfilling rights which are granted
because of membership to the community as a citizen, it lacks legitimacy.
But because there is a deficit of legitimacy and no credible authority, indi-
vidual sacrifice in the form of tax duties is denied or circumvented, thus
rendering the state unable to finance the fulfillment of rights in the first
place. In other words, taxation conditions citizenship, while citizenship
conditions taxation. It is one of the main challenges for committed policy
makers to overcome this paradox and break the cycle between low taxa-
tion and low and inefficient underfunding of the citizenship rights. This
is of especial importance in times of uncertainty, as history shows that
frequently the less-conflictive policy alternative was external financing via

debt, inflation, or windfall profits derived from commodity price booms.
All with negative effects for human development in the long run.
2.3 Elites and Taxation
The role of elites is essential to understand the conditions under which
social and economic development can take place (Amsden et al., 2012). In
taxation, the power of elites is broadly acknowledged to oppose or accept
progressive tax policy and achieve greater state capacity (Herrera &
Ferraro, 2013; Scheve & Stasavage, 2016). Taxing the elite represents a
big challenge in every country in political, administrative, and legal terms
(Tanzi, 2014), which in Latin America is clearly observed through the
multiple ways the elite exert power in critical periods of debate and
reform—particularly in the form of instrumental and structural powers
(Fairfield, 2015). Thus, the elite that matters in this book has to do with
those individuals somehow related to economic and political decisions.
The chapters of this book provide several lessons to deepen and expand
the field of elite studies and to assess the role the elite plays in Latin
American tax policy. To begin with, one lesson relates to the level or scale
to analyze the influence of the elite. Too often, the elite is conceptualized
at the national level, that is, as a homogeneous actor within countries.
However, the evidence in this book suggests that a more fine-grained anal-
ysis of the elite and its influence on taxation is needed. The chapters that
track the historical dimension of taxation in this book suppose that the
influence of elites has to do with differences in power or resources, which
are, for example, based on the control of economic sectors, regional politi-
cal power in the case of regional caudillos, or other resources that facilitate
their influence on national decision making. As Saylor argues in this book,
such conflicts between elite groups frequently represented a greater threat
than external wars in Latin American countries during the nineteenth
century. As a consequence, tax systems remained decentralized to main-
tain domestic peace at the cost of the development of effective tax systems
(Aboites Aguilar, 2003).
On the other hand, the power and influence of local elites is decisive for
the long-term development of tax systems in federal systems of govern-
ment. Following the classic federalist theory (Riker, 1964), Schneider in
his chapter states that “federalism is often an elite affair”, highlighting the
multiple intra-elite bargaining taking place at regional–national or
246 J. ATRIA ET AL.
regional–regional cleavages (Carmagnani & Bidart Campos, 1993). As

such, these multiple fiscal bargains put into play not only the fiscal capacity
and the ways public resources are spent, but also the ability of the state to
penetrate its territory and transmit credibility, while ensuring that resources
are part of a generalized web of interstate cooperation and collection lev-
els, which redound to a convenient shared sacrifice in the long run.
Second, some chapters show that elite interests cannot be assumed to
be uniform and unified. Rather, the confrontation of interests appears as a
crucial factor behind the evolution of Latin American tax regimes. Even
though, as Biehl and Labarca analyze, Latin American elites accepted the
introduction of income taxes in the wake of economic crisis, substantial
direct taxation did not succeed and proved to be temporary. Several rea-
sons were highlighted why tax systems were not geared up to strengthen
state capacity: countries pursued other strategies to face the effects of their
global economic insertion, solved elite conflicts arose from economic
interests of each country’s ruling coalition members—for example, net
debtors versus net creditors, as Saylor shows—at the cost of taxation, or
reallocated duties and benefits derived from taxation (see Schneider, in
this volume). In addition, the contribution of high-income taxpayers has
been resisted or deprioritized in the light of revenue extraction from other
sources, or during cycles of international economic prosperity, as can be
deduced from Gómez-Sabaini et al. in this volume.
In this sense, although some chapters (e.g. Biehl and Labarca; Garita;
Castañeda) suggest the presence of uncooperative behavior of existing
elites along different moments of Latin American development, it is also
clear that the pattern of insertion in the international economy has played
a key role in the evolution of regional taxation. The pressure of external
conditions alongside with internal dynamics has led to tax systems with
different characteristics—for instance, Brazil is not to be compared in
terms of tax capacity with Central American countries, in particular
Guatemala—though they tend to share low progressivity and redistribu-
tive levels as common features. This finding calls for further research on
the interaction between elites and taxation in a combined historical, trans-
national, and relational perspective. In particular, processes and outcomes
result from fiscal bargaining, elites’ coalitions, and the specific impact that
different cycles of the international economy have on the tax policy in
Latin American countries.
By the same token, further research on elite cohesion can help under-
stand the strategies of negotiation within elite members and the types of
elite coalitions influencing the making—and breaking—of domestic tax

systems. For example, the changes in the models of business coordination
and political representation observed in the Colombian case by Castañeda
raise new questions on the mechanisms used by the elites in state–business
bargaining and the institutional responses to these pressures. New pat-
terns of business involvement in political and legislative processes might
reshape tax systems in the future with unknown consequences in terms of
the tax structure, tax expenditure, or the feasibility of the income tax.
Third, research included in this book suggest that the fiscal pact that
gives sense and sustainability to taxation in the context of the nation state
formation in Europe has not taken place in Latin America, given impor-
tant factors related to elite cooperation. Regional fiscal pacts seem to
emerge from short- or medium-term responses to transnational economic
cycles or conjunctures, and taxes operate as a means of exchange. That is,
tax duties represent a sacrifice to achieve short-term elite self-interests
instead as a promise of a long-term contribution and commitment. Even
though the latter includes an expectation that some goods or services may
be obtained in return, it is not subject to economic uncertainty nor to
disagreements with the state.
According to Biehl and Labarca, Latin American tax structures, in par-
ticular a narrow tax base, reflect collective action problems that economic
and political actors confronted as the state strove to improve consent and
achieve compliance. Given certain historical events such as the First World
War, states recurred to elite taxation as a last resort—in the form of a
class-based personal income tax—albeit it was conceived of as a temporary
solution. Once the world demand for natural resources recovers, it would
become unnecessary. The dispensable nature of taxation is also observed
in legislation: although the income tax is a part of tax laws in most Latin
American countries since the first few decades of the twentieth century, its
lack of effective enforcement is well known since the very beginning.
As said, the elite does not constitute a homogeneous and unified group
of interests. So, the differences Schneider finds: differences of power or
configurations of interests among Brazilian federal states or economic
activities—agricultural export elites versus other economic activities, or
the state of Sao Paulo and other major export states versus weaker states
during the Brazilian Old Republic—can be compared to what Castañeda
describes regarding the relative autonomy of economic conglomerates
competing or lobbying for influence to explain the making of numerous
small tax reforms instead of structural ones. However, the cases studied in
248 J. ATRIA ET AL.
this book show that Latin American elites share a common peculiarity.
Elites appear to be difficult to discipline and unwilling to pay, suggesting—
as Biehl and Labarca find—the lack of a social objective pursued by the
state. This resulted in the reliance on traditional paternalistic forms of
insurance in the labor market or within subnational states as temporal
solutions and a non-organic income taxation in which privileges, exemp-
tions, evasion, and avoidance have characterized its performance.
Achieving more progressive and redistributive tax systems, sustained by
a more visible and long-term fiscal pact, suggests complex processes of
negotiation for the future. Upcoming improvements should include a
higher diversification of the tax structure, a broader view of international
conditions, and a wider tax base with a compromise of greater social
expenditures. Recent evidence shows that redistribution can also be
pushed by center-right governments, though under special conditions and
including the participation of several organized actors (Fairfield & Garay,
2017). This scenario raises new questions on social policy expansion, elec-
toral competition for low-income voters, and the changes in political
economy that facilitate rethinking fiscal pacts.
In addition, the nexus between elites and taxation should be further
explored in a relational perspective. Most of the studies on this topic remain
neo-institutionalist in design and frame elite behavior as rational choice.
Only a few studies for Latin America have examined the influence of elites
in shaping overall social norms of merit, need, and equality, detected as
important values to argue progressive taxation (Gaisbauer, Schweiger, &
Sedmak, 2013). Even more, the discursive and normative legitimation of
limited redistribution via taxation of Latin American elites is seldom stud-
ied (Atria, 2014; Grimson & Roig, 2011), as are strategies of framing tax
policy proposals in public discourse or public agenda setting, found as
important in other countries (Lakoff, 2014). In fact, it seems remarkable
that in societies marked by high levels of inequality and poverty, public
debates about structural tax reform are comparatively seldom.
2.4 Inequalities and Taxation
By most measures, both income and non-income based, Latin American
countries tend to exhibit the highest levels of inequality in the world.
According to the Gini index provided by the United Nation, 15 out of the
25 most unequal nations on earth are located in Latin America.
Concentration of income is also remarkable as available data report that
the five countries with the richest 1% of the population are all Latin
American countries (CEPAL, 2016). A salient characteristic of this situa-
tion is its entwinement with other forms of social inequality such as ethnic
or gender inequalities.
Excessive inequality levels—as experienced by most Latin American
countries—are a source of major concern as they tend to generate harmful
effects on a range of goods societies value, such as security, stability, eco-
nomic growth, and happiness. For the interest of this book, inequality is
both a cause and a result of the Latin American challenges in taxation.
Inequality is partly the result of tax systems that collect too little, par-
ticularly from the richest. Revenue collection of the personal income tax—
framed by Johannes Popitz as the “queen of taxation” (Popitz, 1926)
given its high potential to redistribute income, is very weak (see Atria et
al., this volume). The tenth decile, the only decile that basically contrib-
utes to income taxation in the region—rendering it a class tax in the words
of Biehl and Labarca—has effective tax rates that range between around
1% (Paraguay) and 10% (Mexico). Just to compare, 25.6% is the average
effective tax rate of the tenth-decile member countries of the Organisation
for Economic Co-operation and Development (OECD). (CEPAL &
Oxfam, 2016). It is evident that tax policy is an important explanation of
the high inequality of income experienced in the region. In fact, according
to a study of CEPAL (2016), if taxation of the richest decile reached 20%,
that is, an effective tax rate lower than the average of Europe, regional
GINI would drop to 0.36. A level that is close to the OECD average.
This book and its approach brings new understanding into this relation
between taxation and inequality, particularly on how inequality may lead
to poor and deficient tax system, and what elements should be taken into
account when analyzing possible solutions.
In relation to the inequality–taxation link, an aspect that most authors,
either from a historical, transnational, or relational perspective, high-
lighted was the enormous influence that some relevant groups had on
defining tax policy, be it the ranchers and the coffee planters in Argentina
and Brazil in the nineteenth century described by Saylor and usually cap-
tured into the concept of elites, or the business interest groups in Colombia
described by Castañeda. This is a narrative already established by eco-
nomic historians, which explain the perpetuation of Latin American
inequality as the consequence of a self-interested groups that create insti-
tutions that reproduced historical inequalities (Sokoloff & Zolt, 2007).
However, this research underscores other important elements worth con-
sidering in the study of this association.
250 J. ATRIA ET AL.
One salient element of this book is how the formulation of social policy
has been more responsive to the need of attracting foreign capital and
generating economic growth than to the urges coming from extended
poverty and inequality. Garita evidences the indiscriminate use of tax
incentives in the region, coming from a narrative that asserts that by
reducing taxes more foreign capital can be attracted. Although proven to
be deceived, this narrative and its connected policy implication perpetu-
ates weak state capacities and results in fragile capacities to tackle poverty
through robust social policy.
Not only by tax incentives has the region reproduced a tax system that
is unable to reduce inequality, but also through a weedy system of insur-
ance. Biehl and Labarca show how the existing fiscal pact in Argentina and
Chile used their labor market to process economic uncertainty and counted
on employees and employers to provide contributions to insurance firms
(e.g. for pensions and health). Under this system, protection and insurance
is subject to other factors different from the needs of the disadvantaged.
Another relevant input is the importance to go beyond this idea so
common on studies on inequality in Latin America, which states that only
by taxing the super-rich inequality could be reduced. As it becomes evi-
dent in the study of Biehl and Labarca, the impossibility of taxes to con-
tribute to a reduction in inequalities comes precisely from the fact that
only elites pay direct taxes on income. The impossibility of going beyond
a class tax has been a limit to a strong redistributive tax system that requires
not only a wide tax base but also cooperation and solidarity.
An additional relevant element that this book has included is the gender
perspective. A good component of the high socioeconomic inequality
experienced in the region has to do with the existence of high levels of
gender inequality. Tax policy, by not recognizing gender differences, helps
perpetuate them. So far, the study of the inequality–taxation link has
ignored gender differences and gender biases that exist in taxation. The
chapter of Rodriguez and Aguila show that such biases, although not
explicit in tax legislation in the region, can shed new insights. In fact, it may
render common wisdoms upside down. For instance, a gender-blind analy-
sis of taxation may suggest that a certain tax may be progressive and favor
reductions of inequality, but there is a process of tax burden shifting inside
households between male and female, which may circumvent the redis-
tributive purpose of the tax. For instance, a tax on luxury cars in practice
could mean that income from the female—usually with lower income—is
shifted so that men can maintain the same levels of consumption. In the
same vein, some tax configurations, although “progressive”, may encour-

age women to take more time off paid work to provide unpaid care work,
while it is well known that it is precisely women’s long-term absence from
paid work that exacerbates gendered pay and income gaps. These examples
highlight that traditional gender-blind tax analysis ignores important effects
on multilayered and entangled inequalities. If policy does not take into
account this aspect, it is questionable if inequalities, both gender and
income, can be reduced.
2.5 Fairness and Taxation
The regressivity of Latin American tax systems reveal, beyond an economic
evaluation, an unequal tax burden between taxpayers, high levels of fiscal
inequity in comparative perspective, and a subsequent weak role of the state
in tackling high socioeconomic disparities. This suggests that one principal
characteristic of tax systems in Latin America is that they are unfair.
Considerations of fairness and taxation are of special importance in times of
uncertainty, in which the fiscal costs of adapting to changing economic cir-
cumstances have to be allocated within the society. Latin American history
shows, however, that in times of austerity weakly organized, non-
represented, and marginalized groups are more likely to pay the lion’s share
of structural reform.
Several challenges exist to improving fairness in Latin American taxa-
tion. Starting from the findings of this book, the following elements are
discussed: first, the exemptions, mechanisms, and special regimes, under-
stood as tax expenditure, still play a decisive role in the region’s tax systems.
This is shown in chapters by Garita and Castañeda in the Guatemalan and
Colombian cases, respectively, albeit its magnitude and importance is also
clear in Chile (Agostini et al., 2012; Atria, 2015; Jorratt, 2013), and other
Latin American countries (Villela et al., 2009, Biehl and Labarca in this
volume). Fairness concerns arise from tax expenditure, especially with
regard to taxation on high-income earners, as it creates horizontal inequi-
ties, makes its monitoring and enforcement difficult, and facilitates tax
noncompliance with help of experts that accommodate the tax law in ben-
efit of particular interests of taxpayers (Harrington, 2016). Nonetheless,
high levels of tax expenditure produce vertical inequities as well, by dimin-
ishing the income tax potential (Corbacho, Cibils, & Lora, 2013) and
favoring the reproduction instead of the reduction of income disparities. In
addition, as shown by Rodríguez and Águila the tax exemptions tend to
benefit male taxpayers, increasing gender inequality.
252 J. ATRIA ET AL.
Chapters in this book show that tax exemptions, mechanisms, and

deductions are a fundamental part of business–state negotiations, either to
reduce taxation on the wealthy or to achieve agreements with specific eco-
nomic groups or sectors. Tax expenditure is a tool of government action,
which still can be used easily in many countries from diverse ideologies
and with distinct objectives. To the extent that its measurement is complex
and still incipient, it is not always subject to public scrutiny nor easy to
monitor; tax expenditure strongly affects tax policy in Latin America—
though not exclusively—when it affects income taxation, as this tax mostly
depends on the highest income deciles.
Second, challenges of tax fairness in Latin American tax systems also
relate to gender inequalities, which are visible in their everyday perfor-
mance. Following the findings of Rodríguez and Águila, the gender gaps
are a key component within socioeconomic disparities. Thus, taxation can
play a positive role in containing and reducing those inequalities, while a
neutral or negative role redounds in their reproduction or intensification
and in an unfair fiscal performance.
Based on the Argentinean tax system, Rodríguez and Águila report
biases resulting from law interpretations (imputation of family allowances
and discriminations derived from differential treatment by sources of
income), which would also be present in the Guatemalan, Chilean, and
Ecuadorian cases, as the previous evidence cited by the authors shows. In a
broader perspective, Rodríguez and Águila highlight the relevance of fur-
ther research to know the impact institutions have (e.g. tax institutions) on
the reproduction of the economic subordination of women, for instance by
neglecting additional difficulties of women in labor market or the high
frequency of female-headed poor households, among others. Taking these
challenges seriously also implies rethinking the way tax issues are investi-
gated and the approaches of social sciences to conduct such a research. We
should keep in mind that tax policy represents a fundamental instrument of
distributive justice (Murphy & Nagel, 2002), which in this case might
relate to the aim of contending economic discrimination against women
(Alstott, 2009).
Finally, some chapters of this book, in particular the ones by Castañeda
and Garita, find new insights regarding the processes of tax law making,
which also have fairness implications. Tax studies should focus on legisla-
tive discussions as a crucial space where particular interests are confronted,
and the risk of giving unequal representation to non-organized citizens
emerges. The making of tax law, and the influence of interest groups on
policy makers’ preferences occur within specific political, economic, and

cultural contexts, but some typical factors are legislative malapportion-
ment (Ardanaz & Scartascini, 2013), lobbying, lack of regulation of politi-
cal financing, the pressure of organized groups, conflicts of interest, and
corruption, among others.
Assuming that one of the greatest challenges in Latin American public
institutions is to improve the performance of the state to increase its
extractive capacity and a more expansive and effective social policy, the
negotiations of tax law are critical turning points. Hence, a broader public
debate on tax policy-making processes, and more transparency of the
instances where private–public negotiations take place (Atria, 2016)
should contribute to fairer outcomes.
A recent case of high relevance to exemplify possible improvements in
this field is the Chilean initiative of public reform in issues of corruption,
conflicts of interest, and influence peddling after a series of corruption
scandals in which a number of businessmen and politicians were involved.
A Presidential Advisory Council was created with participation of scholars,
members from civil society organizations and think tank representatives.
The work of this council alongside with a public debate pushing for insti-
tutional changes allowed the creation of a short- and medium-term agenda,
including new regulations on public–private relationships, political financ-
ing, and civic education programs, and many of them have been enacted.
The consequences of these reforms are still unclear. However, these mea-
sures can provide more information on public–private negotiations and
favor citizen control while giving more transparency to the making of law.
3 Conclusions and Ways Ahead

The idea that taxes are essential for understanding society isn’t new. As
Schumpeter stated at the beginning of the twentieth century “public
finances are one of the best starting points for an investigation of society,
especially though not exclusively of its political life” (Swedberg, 1991,
p. 101). In this book, the idea that taxation is crucial to understand impor-
tant dynamics within the society but also that social, political, and eco-
nomic dynamics help explain changes in taxation was applied to
contemporary challenges in Latin American tax systems. Chapter contri-
butions explored the relational, transnational, and historical dimensions of
taxation for specific aspects of tax regimes and in diverse countries. Thanks
to this approach, it deepened the understanding of durable challenges in
254 J. ATRIA ET AL.
Latin American tax systems, like the persistent dependence of revenues

from extractive industries, the regressivity in tax systems, the low weight
of the income tax, tax policy, or the gender bias in tax.
Revising these findings, this final chapter demonstrated that—thanks to
the multidimensional perspective these studies apply—they have the
potential to shed light on wider topics Latin American democracies face
today. In particular, such tax analysis speaks of issues such as volatility, citi-
zenship, elites, inequality, and fairness. Taxation may not be the first entry
point to explore these challenges but the relation between taxation and
these issues provides additional and complementary views on specifica-
tions, mechanism of reproduction, or potentials for change. Frequently,
taxation appears to be a decisive but underexploited instrument to con-
front these challenges in Latin America.
The examination of taxation within a relational, historical, and transna-
tional dimension also enables to explore other aspects of tax regimes which
have been beyond the scope of this book but are of major concern in Latin
American taxation. Frequently, themes such as tax compliance, the influ-
ence of transnational actors and institutions or the role of capital concen-
tration have been mentioned in this book but should be further explored.
Although with a large tradition of research tax noncompliance remains
a central challenge to Latin American states, in light of the perspective
proposed in this book, future research should study tax compliance not
only considering evasion trends or technical questions of tax design, but
move toward a broader understanding of types of noncompliance and
ways in which tax institutions have been designed—throughout history
and in relation to certain relational and transnational aspects—which
impacts on the ways in which the payment of taxes is organized.
Further research should also shed more light on the role transnational
actors and institutions play in Latin American tax regimes. Some decades
ago several social science studies explored the impact of international orga-
nizations such as the International Monetary Fund (IMF) or the World
Bank on the reorganization of tax policy. Further studies could follow these
examples and investigate the importance of upcoming actors, such as
OECD, Economic Commission for Latin America and the Caribbean
(ECLAC), or Inter-American Development Bank (IADB), which shapes via
intercountry coordination, the diffusion of values, ideas, and practices which
are considered efficient, fair, and adequate in taxation. The relation of tax
systems with global private actors responsible or facilitating licit and illicit
global capital flows or institutional arrangements, such as investment trea-
ties, or free trade agreements should also be further studied. These studies
can build on the insights in this volume that in Latin America tax regime
formation has been narrowly linked to transnational aspects of power and
international economic insertion.
Finally, future research should continue to study the dynamics of
inequality and concentration of wealth in high-income groups with the
help of tax information, following the developments in economic science
in recent years. However, such findings have to be completed with the
study of tax and redistributive perceptions and preferences. This would
allow to relate the advances in economics with those of sociology, political
science, and history, exploring how trends in income concentration and
the strong elite influence in Latin American tax systems prompt particular
patterns of beliefs, perceptions and preferences on taxes, redistribution,
and the role of the state in general. This would help uncover the dominant
values and meanings in the conception of taxes; the conditions under
which taxation is discussed, framed, and designed; and how the feedback
of tax policy and its institutions transmits, stimulates, and reinforces,
which is considered as just, fair, and efficient in the realm of taxation. Such
research can be built on the findings of this book, which hopefully fos-
tered a more comprehensive understanding of taxation and will help make
taxation fairer, just, and more sustainable in the region.
Note
1. Several authors have developed a critique of contemporary political analysis
focusing on these pitfalls. See for instance, Luna, Murillo, and Schrank
(2014).
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Index1
A tax expenditure, 220

Agricultural exports, fiscal federal tax system, characteristics of,
subnational state-building for, 64 171–172
Águila, N., 21, 243, 250–252 War of the Triple Alliance,
Alliance for Progress, 3, 22n2 impact of, 40
ANDI, 204 weak tax institutions, 50
Apólices, 45, 47 Argentine Confederation, 41
Ardila-Lule, C., 205 Argentine Federation, 41, 97
Argentina, 7, 19, 101, 103, 108, 111, Arzú, Á., 222, 223
240, 243 Asignación Universal por Hijo y la
Baring Crisis, 44 Asignación por Embarazo para la
debtor coalitions and fiscal policy, 39 Protección Social (AUH, Universal
debtor ranchors in, 40–44 Allocation per Child and
fiscal pact, 250 Pregnancy Allocation for Social
fuel taxes, 169 Protection), 179, 183n32,
gender-based discrimination in 183n33
taxation, 243 Atria, J., 22, 22n1
gender bias of regressive taxation, 180 Australia, 89, 90, 103, 114n15
gender bias of taxation, 21 Authoritarianism, 81n7, 191
inflation, 9 Average tax revenue, 5–7, 162, 193
political uncertainty, 10 Avoidance, 6, 7, 16, 18, 105, 162,
taxation, 5, 8, 9 219, 243, 244, 248
Note: Page numbers followed by ‘n’ refer to notes.

1

DOI 10.1007/978-3-319-60119-9
260 INDEX
B Business coordination, 188, 192, 193,

Baldetti, R., 226, 229n4 203, 206, 247
Banco de la Provincia de Buenos Aires, Business groups, 12, 187–209
41, 42, 51n10, 51n12 Business interest groups, 190–193, 249
Banco do Brasil, 45, 48
Baring Brothers, 41–44
Baring Crisis, 44 C
Bellicist theory, 32, 33, 35, 36, 39, 40 CACIF (Comité Coordinador de
Biehl, A., 242, 244, 246–248, 250 Asociaciones Agrícolas Comerciales,
Bilateral Investment Treaty (BIT), Industriales y Financieras), 224,
153n16 227, 228
BIT, see Bilateral Investment Treaty Capital investments, 18, 134
BNDE, see National Bank of Economic Capitalist economic development, 13
Development Cardoso, Fernando Henrique,
Bolivar group, 204 75, 79
Bolivia, 96, 97, 99, 101, 126, 134–137, Cartelization, 217
140, 141, 144–148, 150, 152n11, Castañeda, N., 243, 244, 247, 249,
154n22, 181n4, 243 251, 252
political uncertainty, 10 Caudillos, 32, 101, 114n9, 245
taxation, 5, 6 Cédulas, 42, 44, 48
Brazil, 19, 96, 97, 101, 108, 181n4, Central America
240, 243, 246 debtor coalitions and fiscal
Conservative Party, 45 policy, 37
debtor coalitions and fiscal policy, 39 export-processing zones, 216
federalism and tax in, 57–81 Centralization, 71–74
Liberal Party, 47 Centre for Social Conflict and
political uncertainty, 10 Cohesion Studies, 22n1
taxation, 5, 8, 9 CEPAL, 249
tax exemptions in, 220 Cerezo, V., 222
tax expenditure, 220 Charter of Punta del Este, 22n2
War of the Triple Alliance, Chile, 8, 50n5, 50n7, 97, 101, 105,
impact of, 40 108, 111, 114n18, 126, 130,
weak tax institutions, 50 141, 144, 145, 147, 150,
Brazil foil fiscal development, 152n10, 152n11, 153n16,
coffee planters in, 44–49 154n22, 154n28, 167, 181n4
Brazilian Geography and Statistics debtor coalitions and fiscal policy,
Institute, 67 37, 38
Brazilian Old Republic, 62–67, 71, 247 elites influence on fiscal policy, 32
Brazilian tax system, 20 fiscal pact, 250
Britain, 96, 113n4, 113n7 political uncertainty, 10
Buchanan, J.M., 217 taxation, 6, 8
Business associations, 188, 190, 191, Chilean Sciences and Technology
196, 203–205 National Council, 22n1
INDEX
261
China, 125, 130, 202 Consumption taxes, 7, 66, 69, 100,

economic uncertainty, 9 104, 110, 111, 113, 162, 165,
tax holidays, 216 166, 173, 178
CIAT, 218 Contribución predial, 50n6
CICIG, see International Commission Corporate income tax, 7, 8
against Impunity in Guatemala Corporatism, 61, 68, 69, 191
Citizenship, 241–245 Corruption, 10, 75, 213, 214, 218,
taxation and, 245 226–228, 253
Civic education programs, 253 Costa Rica, 7, 97
Coalitional presidentialism, 79, 80 debtor coalitions and fiscal
CODELCO, 134, 135 policy, 37
Coefficient of variation, 136, 140, fiscal dwarfism, 219
144, 145 Cost–benefit analysis, 214
Coffee planters, in Brazil foil fiscal Critical junctures, 16, 62
development, 49 Cuba, 6, 96
Coincident reform, 61, 62, 64, 66, 74,
80, 81
Collor, President, 75, 78 D
Colombia, 7, 96, 99, 126, 130, 135, Debt crisis, 75
137, 144–147, 149, 150, Debtor coalitions, 35–39
152n11, 154n22, 187–209 Debtor ranchors, 44
business groups, 206 Decentralization, 77, 152n12
debtor coalitions and fiscal policy, 37 Deductions, 22, 149, 164, 174–177,
elites influence on fiscal policy, 32 179, 198, 199, 207, 208, 216,
policymakers, 202 218, 220, 252
president’s ideology and partisan Delegados, 49
power, 201 Democracy, 2, 4, 57, 59, 63, 69, 74,
taxation, 6 92, 93, 97, 102, 105, 108, 112,
tax policy in, 193, 207 222, 244
tax reforms, 2, 244 Democratization, 71, 77
tax revenue in, 200 Depreciation, 33, 35–39, 43, 44,
Colorado Party, 40 46, 49
Colquiri mine, 146 Development, 3, 16, 22, 32, 34–37,
Columbia 39, 44, 49, 99, 101, 110, 125,
business interest groups, 249 126, 129, 131, 134, 135, 170,
COMIBOL, 135 180, 191, 209, 215, 216, 218,
Commercial Association of 238–253
Pernambuco, 47 capitalist economic, 13
Conquest of the Desert, 44 economic, 16, 188, 193, 206, 217
Consejo Gremial Nacional (CGN), 203 and state capacity, 57
Conservative Party (Brazil), 45 sustainable, 11
262 INDEX
Dirección Nacional de Investigaciones y Encilhamento, 49

Análisis Fiscal del Ministerio de Encuesta de Gastos de los Hogares
Economía (National Direction (Household Expenditure Survey),
of Research and Fiscal Analysis 182n22
of the Ministry of Economy), Encuesta Permanente de Hogares
171, 172, 178 (Permanent Household
Direct Tax on Hydrocarbons (2005), Survey), 172
Bolivia, 147 Equity tax, 148, 199
Distributive justice, 170, 174, 252 Estado Novo, 63, 68–71
Dominican Republic, 96, 170, 182n18 Estancieros, 40–44, 108
European Union, 7, 218
Evasion, 6–8, 11, 13, 18, 94,
E 101–105, 109, 153n18, 162,
ECLAC, 7, 89, 102, 125, 146, 149, 175, 180, 193, 195, 214, 219,
161, 181n4, 228n2, 254 223, 228, 228n2, 243, 244,
Economic development, 16, 188, 193, 248, 254
206, 217 Exportation of goods, 216
Economic liberalization, 171, 203 Export-processing zones (EPZs),
Economic Survey of Latin America 216, 228n1
and the Caribbean, see ECLAC Externalities, 94
Economic volatility, 238–241
Ecopetrol, 135
Ecuador, 7, 99, 126, 130, 135–137, F
140, 141, 145–148, 150, Fairness, 251–253
167, 243 FDI, see Foreign direct investment
political uncertainty, 10 Federalism, 245
taxation, 6 Federalism and tax, in Brazil, 57
tax reforms, 2 fiscal federal bargains and, 59–62
Effective interest rate, 33, 36, 37 fiscal federal centralization for
Effective tax rate, 135, 194, 217, 249 industrial deepening and, 71–74
Efficiency, 1, 4, 6, 12, 21, 92, 112, historical periods, 62
133, 140, 190, 195, 200, 202 industrialization and, 67
Elite affaire, 243 liberalization and neo-
Elites, 14–17, 19–22, 32, 34, 37, 38, developmentalism and, 74–80
40, 45, 58, 59, 61, 64–72, 74, rising and falling elite and popular
75, 78, 79, 90–93, 99–104, 108, sectors and, 59
112, 170, 171, 190, 191, 205, subnational state-building for
208, 224, 240, 243–250, 255 agricultural exports and, 64–66
Elite theory, 32 Femininity index, 161, 180n1
El Salvador, 7, 96 Feminist economics, 21, 163, 181n5,
Employment, 9, 95, 113, 129, 149, 181n13
162, 164–166, 174, 180 Financial crisis of (1998), 198
INDEX
263
Financial transactions tax, 199 Gender bias of taxation, 21

First World War, 95, 247 Gender-blind analysis of taxation, 250
Fiscal balance, 9, 154n27 Gender dimensions, of taxation,
Fiscal diversification, 35, 36 166–171
Fiscal dwarfism, 219 Gender gap, 161–163, 165, 167, 172,
Fiscal illusion, 60, 93, 101 176, 179, 180, 252
Fiscal imperative, of bellicist Gender inequality, 164, 166, 168,
approaches, 91 169, 172, 176, 250–252
Fiscal instruments, applied in extractive Germany, 96, 114n14
industries, 132–135 tax expenditure, 220
Fiscal pact, 90, 91, 94, 96–98, 103, GFI, see Global Finance Integration
104, 108–112, 223, 225, 247, Ghana, 166
248, 250 fuel taxes, 169
Fiscal policy, 39, 162 Gini coefficient, 23n6
Fiscal Responsibility Law, 78 Gini index, 161, 248, 249
Fiscal slack, 140 Global Finance Integration (GFI),
Fiscal sustainability, 8, 21, 239–241 229n2
Foreign direct investment (FDI), 9, Goulart, João, 70
22n5, 128, 199 Groll, C., 22
France, 96, 114n14 Gross Domestic Product (GDP),
Free rider, 60, 105 3–5, 18
Free Trade Agreements, 241, 254 Grupo Ardila-Lule, 203, 204
Free trade zone, 241 Grupo Santo Domingo, 204
Frente Nacional, 201 Guatemala, 96, 167, 170, 246
Friedman, M., 217 taxation, 5
Fuel taxes, 166, 169 tax exemptions, 227
tax expenditure, 220
tax incentives in, 228
G
Garita, M., 21, 241, 243, 244,
250–252 H
Gautemala Hacendados, 38
Ministerio de Finanzas de Guatemala Historical dimension of taxation,
(Ministry of Finance), 223 16, 17, 20
Gaviria, C., 196, 201 Honduras, 96, 113n7, 170
GDP, see Gross Domestic Product gender boas of regressive
Gender aspects, of taxation, taxation, 161
163–166 Hydrocarbon industry, 136–141
Gender-based discrimination, Hydrocarbons, 6, 7, 9, 21, 134–141,
in taxation, 243 144–148, 150, 169
Gender bias of regressive taxation, 180 Hydrocarbon sector, 135
264 INDEX
I socioeconomic, 13, 15, 161, 168,

IADB, see Inter-American 170, 172
Development Bank taxation and, 248–251
IDB, 254 Inflation, 4, 9, 19, 33, 35–38, 42–44,
IMF, see International Monetary Fund 47, 49, 69, 71, 73–75, 78, 80,
Importation of goods, 216 92, 101, 109, 113, 182n20, 245
Income inequality, 6, 15, 20, 21, Infrastructural power, 60
223, 226 Institute of Taxation and Economic
Income tax, 5–8, 20, 32, 46, 49, 69, Policy, 213
72, 74, 76, 132, 134, 137, 140, Instituto Centroamericano de Estudios
141, 145–148, 150, 165, Fiscales, 226
174–177, 194–196, 199, 200, Instrumental power, 192
207, 208, 216, 217, 219, Inter-American Development Bank
222–225, 227, 237–239, 244, (IADB), 193, 254
246–248, 251, 252, 254 International Commission against
corporate, 7, 8, 199 Impunity in Guatemala
Latin American, 89–113 (CICIG), 226
personal, 7, 8, 22n5, 166, 169, 170, International investment regime, 241
173, 174, 177, 182n20, 194, International Monetary Fund (IMF),
196, 198–200, 225, 247, 249 4, 8, 32, 149, 222, 254
INDEC (National Institute of Investment allowances, 216
Statistics and Census), 172
India
economic uncertainty, 9 J
Indirect taxes, 5, 7, 18, 31, 72, 77, Joint Tax Program, 3
104, 110, 111, 162, 166, 167,
169, 170, 172, 178, 180, 187,
190, 193, 195, 200, 202, 207, K
208, 222 Kemmerer mission, 99
Industrialization, 31, 58, 65, 71, Kemmerer, Edwin Walter, 97, 100
108, 240 Kennedy, John F., 22n2
fiscal federal parallelism for, 67–70 Keynesian economic theory, 239
Inequality, 8, 12–15, 21, 22, 92, 102, Kubitschek, Juscelino, 67
103, 109, 111, 113, 150, 162,
170, 179, 180, 191, 200, 202,
208, 215, 239, 248, 252, 255 L
gender, 164, 166, 168, 169, 172, Labarca, J.T., 242, 244, 246–248, 250
176, 250–252 La Linea, 226, 229n4
income, 6, 15, 20, 21, 223, 226 La Nación, 42
moral economy of, 15 Land taxes, 32
reproduction, 16 Land value tax, 50n6
reproduction mechanisms, La Prensa, 43
persistence of, 174–177 Latin America
INDEX
265
debtor coalitions and weak tax gender bias in taxation, 166

institutions, 31–50 land value tax, 50n6
gender bias of regressive taxation, 180 political uncertainty, 10
taxation during uncertainty, 22 taxation, 5, 6, 9
tax incentives in, 228 Middle-class, 8, 10, 77, 79, 190, 195,
Latin American Free Trade 198–200, 205, 208
Agreement, 18 Milréis, 49
Latin American income taxes, global Minas Gerais, 65
uncertainty in evolution of, 89 “Mínimo no imponible” (non-taxable
income taxes and state fragility, minimum), 175
91–97 Mining industry, 141–145
labor market and state fragility, 104 Mining Royalties Law (2011),
Law of maquilas, 224 Peru, 146
Legitimacy, 14 Mismanagement hypothesis, 127
Liberalization Molina, O.P., 226
economic, 203 Monotributo, 175–177
market, 190, 205 Monzón, J.C., 229n4
trade, 192, 202 Moral economy of inequality, 15
Liberalization and neo- Morocco, 169
developmentalism, in Brazil, 74 fuel taxes, 169
Liberal Party (Brazil), 45, 47, 201 gender bias in taxation, 166
Liberal tax reforms, 2, 5, 12, 18 gender bias in tax system, 164
Lobby, 41, 188, 196, 203–205, Multidimensional perspective of
207, 208, 218, 222, 224, 228, taxation, 235–238
247, 253
Lula da Silva, Luiz Ignacio, 79
Luxembourg Leaks, 18 N
Nation building, 104
National Bank of Economic
M Development (BNDE), 70
Macroeconomic stabilization, 1 Neoliberal policies, distributive
Maquilas, 181n7 effects of, 12
Marginal tax rates, 146, 194, 198, Net creditors, 33, 36, 39, 47, 246
206, 217 Net debtors, 33, 36, 37, 39, 246
Market liberalization, 190, 205 Net wealth tax, 199
Mexico, 7, 8, 61, 97, 126, 130, 135, New Zealand, 89, 90, 103
137, 140, 145, 148, 149, 151, Nicaragua, 96
154n21, 154n22 political uncertainty, 10
debtor coalitions and fiscal policy, N.M. Rothschild & Sons
37, 38 of London, 45
elites influence on fiscal policy, 32 Norway, 103
266 INDEX
O elites influence on fiscal policy, 32

Observatorio para la Igualdad de political uncertainty, 10
Género de América Latina y el taxation, 6
Caribe (OIG, Gender Equality in Peso corriente, 41
Latin America and the Caribbean PetroEcuador, 135
Observatory), 182n15 PIT, see Personal income tax
Oceania, 95, 114n16 Pluralism, 206–207
OECD, 6, 23n6, 193, 194, 214, PMDB, see Party of the Brazilian
217–219, 228–229n2, 249 Democracy Movement
Oficina de Cambios, 42 Policy fragmentation, 188, 190, 207
Oil shock, 71, 74 Policy integration, 192
One size fits all policy Policymakers, 200–202
recommendations, 11, 12 Political financing, 253
Optimal tax theory, 12 Political legitimacy, 77
Oxfam, 170, 181n11 Portillo, A., 223
Poverty index, 161
Prebisch, R., 89, 90, 96, 102, 103
P Presidential Advisory Council, 253
Panamá Presidential coalitionism, 78
taxation, 5 Privatization, 75, 78, 79, 82n9
Panama Papers, 18 Progressivity, 12, 21, 92, 103–105, 108,
Paraguayan War, see War of the Triple 126, 132, 135, 144, 146, 147,
Alliance 151, 162, 168–170, 173, 174,
Party of Brazilian Social Democracy 178, 180, 208, 209, 223, 226
(PSDB), 79 Property rights, 92, 129
Party of the Brazilian Democracy Property taxes, 5, 97, 151
Movement (PMDB), 78 PSDB, see Party of Brazilian Social
Pastrana, A., 201 Democracy
Payroll taxes, 5, 111, 194 Public Economics, 3
PDVSA, 135 Public–private relationships, 253
PEMEX, 135 Pulperías, 38
Perón, Juan Domingo, 108
Personal income tax (PIT), 7, 8, 22n5,
90, 91, 94, 96, 97, 99–102, 104, Q
106, 107, 110–112, 148, 151, Quadros, Janio, 70
166, 169, 170, 173, 174, 177, Quick-fix tax reforms (mini reformas
182n20, 194, 196, 198, 199, tributarias), 189, 196
225, 247, 249
corporate, 200
Peru, 97, 126, 130, 137, 144–147, R
150, 152n11, 153n16, 154n22 Real Plan, 75
debtor coalitions and fiscal policy, 37 Reciprocity, 13, 15, 94, 95
INDEX
267
Redistribution, 1, 6, 7, 15, 48, 92, 93, Social inclusion, 109

103, 104, 109, 148, 180, 188, Sociedad Rural Argentina, 42
190, 195, 202, 206, 207, 222, Socioeconomic inequality, 13, 15,
248, 255 161, 162, 168, 170, 172
Regressivity, 7, 21, 22n5, 77, 80, 90, Solano López, F., 40
102, 104, 105, 110–112, 130, South Africa, 166, 181n10
161–180, 188, 199, 207, 222, 223 fuel taxes, 169
Relational dimension of taxation, Soviet Union, 114n11
13–16, 19, 20 Special Mining Lien, 147, 154n24
Reprimarización, 19 Special Mining Tax, 147
Revolución Juliana, 99 Specific Tax on Mining Activity,
Rio News, 47, 49 145, 147
Ríos Montt, Efraín, 222, 225 State capacity, 20, 34, 35, 99, 100,
Roca, J.A., 44 209, 222, 227, 228, 240, 245,
Rodríguez Enríquez, C., 21, 243, 246, 250
250–252 and development, 57
Rousseff, Dilma, 80 State fragility
Royalty, 45, 124, 132, 134–137, 140, income taxes and, 91
141, 145–147, 150, 153n21 labor market and, 104–110
State-led industrialization, 69
State legitimacy, 109, 242
S State participation, 126, 132, 134,
Sales tax, 68, 72 135, 146, 147, 151
Samper, E., 198, 201 State–society relations, mediation of, 59
Santo Domingo, J., 205 Structural adjustment, 63, 75, 194
Santos, J., 201 Sudden stops, 128
São Paulo, 65, 73, 74 Superintendencia de Administración
Sarmiento Angulo, L.C., 205 Tributaria (SAT), 223, 227, 228
Sarmiento-Angulo group, 204 Supply-side economics, 4
SAT, see Superintendencia de Sustainable development, 11, 131, 228
Administración Tributaria Sweden, 103, 114n17
Saylor, R., 19, 240, 243, 245, 246, 249
Scandinavia, 95, 114n13, 114n16
Schneider, A., 20 T
Schneider, B.R., 240, 243, 245, 247 Taxation
Schumpeter, J.A., 253 economic volatility and, 241
Second World War, 90, 100 elites and, 248
Seignorage, 70 fairness and, 253
Sindicato Antioqueño, 204, 205 gender-based discrimination, 243
Single-parent households, 164, 168, 177 gender bias of, 21
Sistema Integrado Previsional Argentino gender-blind analysis of, 250
(SIPA, Integrated Social Security gender dimensions of, 171
Argentinean System), 172 historical dimension of, 17, 20
268 INDEX
Taxation (cont.) Times, 43

inequality and, 251 Trade liberalization, 75, 192, 202
multidimensional perspective of, 238 Trade taxes, 90–96, 100, 102–104,
relational dimension of, 16, 20 111, 241
as social control, 13 Transnational dimension of taxation,
transnational dimension of, 17–21 17–21
uncertainty in Latin America, 1–22 Tripé, 75
Tax burden, 164
Tax competition, 216, 217
Tax compliance, 14, 15, 76, 95, U
242, 254 Uganda, 166
Tax credits, 216 Uncertainty, 22, 89, 129, 133, 136,
Tax exemptions 151, 187, 189, 236–238, 244,
in Guatemala, 220–227 247, 250, 251
Tax expenditure, 8, 15, 214, 215, 220, Unemployment, 9
221, 224–227, 247, 251, 252 Unified Tax on Combustibles and
Tax holidays, 215, 216, 224 Lubricants, 81n3
Tax incentives, 67, 149, 241, 250 United Kingdom, 166, 169, 181n10,
categories of, 213 184n38
in Guatemala, 213–228 fuel taxes, 169
perspectives on, 215–218 United States, 65, 95, 96, 109, 113n7,
prevalence of, 218, 219 149, 202
Tax incidence, 166, 168 taxation, 9
distributive, improvement of, tax expenditure, 220
172–174 tax incentives, 214
Tax justice, 167, 170, 179 Uribe, A., 194, 199, 201
Tax penalty, 165 Uruguay, 7, 8, 99, 105, 114n9
Tax policy Colorado Party, 40
in Colombia, 193, 207 debtor coalitions and fiscal policy, 37
Tax reforms, 244 gender boas of regressive
Tax revenues, 3, 5–8, 10, 16, 21, 31, taxation, 161
32, 35, 60, 66, 124, 125, political uncertainty, 10
135–137, 140, 141, 144, 145,
206–208, 217, 220, 222, 239
average, 162, 193 V
in Colombia, 193–200 Valdes, M.F., 22
Tax structure, 13, 47, 59, 69, 131, Value Added Tax (VAT), 2, 5, 7, 8,
162, 168–170, 172, 173, 179, 72, 90, 93, 110–113, 148, 151,
187, 189, 193, 196, 199, 202, 153n19, 166, 168, 169, 171,
207, 208, 247, 248 173, 175, 178, 179, 181n3,
Tax wars, 216 182n19, 183n27, 183n28,
Tenentes, 67 184n38, 193–196, 199, 216,
Tiendas de raya, 38 222–225, 228n2
INDEX
269
Vargas, Getulio, 67–69 W

VAT, see Value Added Tax (VAT) Wagners law, 16
Vélez Sarsfield, D., 41 War of the Triple Alliance, 19, 33, 40,
Venezuela, 96, 101, 113n7, 126, 130, 41, 44, 45, 48, 240
134–137, 140, 141, 146–148, impact of, 39–40
150, 154n26 War tax, 199
inflation, 9 Washington Consensus, 4, 5
political uncertainty, 10 Western Europe
taxation, 6, 9 tax incentives, 214
Víctores, Mejía, 222 Workers’ Party, 79
Volatility, 6, 19–22, 38, 101, 109, World Bank, 111, 141, 254
123–125, 133, 134, 136, 140, World Bank Doing Business
144, 145, 147, 148, 150, 151, 240 estimates, 76
economic, 241 World War II, 69
non-renewable natural resources
and, 130–132
sources, and consequences, Y
126–130 Ydigoras Fuentes, M., 222

Rethinking Taxation in Latin America

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RETHINKING

Latin American Political Econom

More information about this series at

Maria Fernanda Valdés

Latin American Political Economy

Library of Congress Control Number: 2017958980

© The Editor(s) (if applicable) and The Author(s) 2018

Cover Image: © Maria Fernanda Valdés

Printed on acid-free paper

This Palgrave Macmillan imprint is published by Springer Nature

This volume represents a timely confluence of scholarly currents. Over the

relational aspect is historical, too, of course. In historical Europe, fiscal

Williams College, Williamstown, MA James E. Mahon Jr.

1 Introduction: Taxation in Times of Uncertainty

Part I Historical Dimension of Taxation 29

2 Debtor Coalitions and Weak Tax Institutions

3 State Capacity and Development: Federalism

Part II Transnational Dimension of Taxation 87

4 Global Uncertainty in the Evolution

5 International Insertion, Volatility and Fiscal Resources

Part III Relational Dimension of Taxation159

6 Gender Bias of Regressive Taxation in Latin America:

7 Business Groups, Tax Efficiency, and Regressivity

8 Tax Incentives in Latin America:

9 Latin American Taxation from a New Perspective:

Nicolás Águila is an economist from Universidad de Buenos Aires (UBA).

Mauricio Garita is a senior researcher at the Instituto Centroamericano

James E. Mahon Jr is Woodrow Wilson Professor of Political Science at

Fig. 1.1 Latin American tax collection as share of GDP,

Table 4.1 Features of 1920s and 1930s modern income taxes

Introduction: Taxation in Times

© The Author(s) 2018 1

2 Taxation in Latin America: Progress

Tax systems in Latin American countries underwent significant changes

only as a collecting tool but as a developmental one. Thanks to these

falling significantly. Likewise, as ordinary tax revenues—like corporate

3 A Moment of Uncertainty for Taxation in Latin

government for growth in Mexíco, and a continuing recession in

the political system caused by massive scandals of political corruption. The

4 A New Perspective on Taxation in Latin America

empirical reasoning—are even more doubting as tax experience in Latin

can build on a combination of insights from previous studies. In particu-

4.1 The Relational Dimension of Taxation

In addition, taxation also interacts with the state in a political dimen-

the elites are more likely to influence the performance of institutions,

4.3 The Transnational Dimension of Taxation

dynamics in tax systems should be analyzed more systematically, not only

5 Research on Tax Regimes in Times

interdependence between global capital and domestic elites influenced

seldom materialized in the desired outcomes, are perpetuated by subse-

Latin American countries subject to conditional lending during the 1990s,

Soifer, H. D. (2015). State Building in Latin America. Cambridge: Cambridge

Historical Dimension of Taxation

Debtor Coalitions and Weak Tax

This chapter draws on Saylor and Wheeler (2017).

© The Author(s) 2018 31

mirrors other outcomes in the political economy. Dependency ­theorists

Yet, nonetheless, Latin American countries were exposed to consider-

2 Debtor Coalitions and Fiscal Policy

macroeconomic implications of fiscal policy mattered more to them than

which prompted landowners and other export-oriented actors to more

exposing governments to significant risk associated with debt servicing.

3 The Aftermath of the War of the Triple

4 Debtor Ranchers in Argentina

Williams College, Williamstown, MA James E. Mahon Jr.

1 Introduction: Taxation in Times of Uncertainty

Part I Historical Dimension of Taxation 29

2 Debtor Coalitions and Weak Tax Institutions

3 State Capacity and Development: Federalism

Part II Transnational Dimension of Taxation 87

4 Global Uncertainty in the Evolution

5 International Insertion, Volatility and Fiscal Resources

Part III Relational Dimension of Taxation159

6 Gender Bias of Regressive Taxation in Latin America:

7 Business Groups, Tax Efficiency, and Regressivity

8 Tax Incentives in Latin America:

9 Latin American Taxation from a New Perspective:

mirrors other outcomes in the political economy. Dependency theorists

ithout societal approval, using “fiscal illusions” to hide the amount