Latin American tax reform in the 1990s has focussed on improving administration and macroeconomic capacity. How can programmes attempt to build national “social contracts”? How can Latin American countries increase emphasis on political and governance dimensions of taxation? This paper from the Institute of Development Studies addresses the political conditions that shape tax reform, structure and performance in Latin America.
Reforms implemented since the 1980s have generally been useful. These include the simplification of tax structures, removal of exemptions, replacement of trade taxes by value-added taxes and an emphasis on improved tax administration. However, reform has come at a price. Other issues have been kept off the tax policy agenda including equity and redistribution, as well as serious concern for governance questions, in particular the interactions between tax policy and the legitimacy of governments and their policies.
Tax policy reforms advocated by the International Financial Institutions (IFIs) have been implemented in terms of reducing taxes on foreign trade, lowering marginal rates on upper incomes and simplifying income tax structures. However, shortcomings in the Latin American experience of tax reform highlight:
- Distribution as one of the main failures of reform. Vertical equity has been largely excluded, regressive impacts are becoming apparent and taxation of land and agricultural goods and services has been neglected.
- Direct taxation is low. Broadening of the income tax base has not occurred and the politics of tax reform remain poorly understood.
- There is a lack of implicit social contract between governments and the general population of a kind that is embedded in politically stable parts of the world.
- Political parties are often clientelistic and unresponsive, lacking cohesion and affecting the capacity of civil society to monitor government and participate in tax debates.
Recently, many Latin American governments have initiated indigenous tax reforms, owing little to International Financial Institutions (IFIs). They are designed to address particular local problems and have been modestly successful. These indigenous reforms provide a basis on which to build a more wide-reaching programme of tax reform tailored to regional and national circumstances, hence policy should focus on:
- Programmes becoming more aligned to the political and governance dimensions of taxation, to build national “social contracts” around issues of public revenue and expenditure.
- Re-examining the distributive effects of the tax system, in particular to tie tax policy to citizen benefits, especially pro-poor expenditure and representation.
- Broadening the VAT base to include agricultural goods and services.
- Urging political institutions in Latin America to broaden and deepen social contracts. For example creating more responsive party systems and improving the capacity of civil society to monitor government.
- Adjusting tax policy and administration to promote economic competitiveness without compromising efficiency, equity or revenue raising potential.
- Re-evaluating the assignment of tax bases and tax revenues among government levels to increase revenue mobilisation, improve horizontal equity and minimise inter-jurisdictional tax competition.
