Both Brazil and India have deepened their democracies over recent years, but with different impacts on state capacity. This paper evaluates changes to state capacity in both countries by looking at the political economy of citizenship regimes and tax. It finds that the distinct evolution of revenues and other policies reflects changes in each country’s citizenship regime.
The concept of citizenship regimes refers to stable mechanisms of incorporation that establish social actors as legitimate participants in political processes and claimants on public resources and authority.
Key findings:
- In Brazil, tax revenue, driven by an increase in income taxes and social spending contributions, increased steadily between 1994 and 2010 from 27.9% to 34.6% of GDP , even amidst liberalisation-induced decreases in tariffs. In India, the increase has not been as marked, shifting by approximately 1.3% of GDP between 1991-1992 and 2011-2012. During this period, fluctuations and downward trends in the 1990s and during the global recession were offset by upward movement from 2001-02 to 2006-07.
- Industrial expansion pursued by Brazilian military elites after 1964 strengthened the middle class and popular sector actors, who became legitimate collective agents in the struggle for democratisation. The need to form majority coalitions in the legislature provided conservative elites with veto power which they use to preserve inequitable exemptions and special tax arrangements for commodity-exporting states. A further element compounding horizontal inequity has been the “fiscal war” among state governments offering incentives to businesses while pressuring the federal government to alter the tax rates paid in other states. In India, a shifting set of social coalitions has been incorporated into citizenship regimes, fragmenting support for building state capacity through tax. Historically, excluded groups included regionally circumscribed language-groups, backward and lower castes, and an urban, middle sector. They came together against the Congress Party in coalition governments in 1977 and 1989, but these coalition governments were unstable and eventually replaced by a polarity of electoral competition between the Hindu-nationalist BJP and the Indian National Congress Party, each attempting to patch together a governing majority in coalition with regional and caste actors. This situation provides limited support for expanding state capacity for tax revenues, although it does allow state capacity to be expanded in other ways, such as state-level incentives in the technology and service export sectors—one of whose prime beneficiaries has been the middle class. This is expressed in the tax system which is full of exemptions, most of which are oriented towards internationally-integrated dynamic sectors.
- While all efforts to incorporate excluded groups are valuable aspects of deepening democracy, they do not always result in a social coalition that supports increased revenues. In Brazil, cross-class coalitions of the popular sector and the middle classes supported an expansion in state revenues to pay for social policies. By contrast, fragmented and shifting cross-cultural coalitions in India did not support expansion in state revenues, even though they did support other kinds of expansion in state capacity, such as the promotion of dynamic, advanced sectors. While short-term policy advice to alter citizenship regimes is difficult, there are good reasons to consider encouraging cross-class coalitions in support of state capacity for revenue mobilization over the medium- to long-term.