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The Politics of Revenue-Raising Tax Reform in Latin America

  • Author(s): Fairfield, Tasha
  • Advisor(s): Collier, Ruth B
  • Collier, David
  • et al.

Increasing tax revenue is imperative for development and good governance in Latin America. Governments throughout the region experienced continued revenue needs in the aftermath of market-oriented tax reforms implemented in the 1980s and early 1990s, yet tax policy outcomes varied widely, across countries, over time and across tax policy areas.

This study explains variation in governments' tax reform agendas and the fate of reform proposals in Chile, Argentina, and Bolivia by analyzing the power of business, a key actor in tax politics in highly unequal societies. Many taxes directly or indirectly affect profits, and business associations may defend the interests of upper-income individuals as well as corporations. The classic concepts of structural power and instrumental power elaborate distinct means of business influence. Structural power arises from a perceived threat that a policy will lead to inadequate investment via market signals. Instrumental power entails deliberate political actions. Sources of instrumental power include relationships with decision-makers and resources that help business pressure policymakers more effectively. When either type of power is strong, taxing elites will be difficult, and reforms that policymakers view as desirable may even be eliminated from the agenda.

In Chile, strong instrumental power kept significant tax increases off the agenda. Weaker business power in Argentina gave governments more leeway to increase taxation at the cross-sectoral level, although some powerful sectors prevented tax increases with sector-specific impact. Bolivia is a rare case where business's substantial power was challenged by counter-mobilization on tax issues and a radical threat from popular sectors to the existing political and economic system.

The analysis is based on 82 tax proposals embedded in 48 reform packages. Cases in which policymakers decided not to propose tax reforms they viewed as important are also examined. Primary data sources include interviews with high-level government and tax agency officials, politicians, and business leaders, as well as congressional records, newspaper articles, tax agency reports, and tax return statistics.

This research provides insights on building state extractive capacity, which has received insufficient attention in political science. It also contributes to theory on business politics by specifying mechanisms through which economic elites influence policy in democratic societies, observable sources of their power, and government strategies that can attenuate their influence on taxation.

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