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Bargaining for Fiscal Control: Tax Federalism in Brazil and Mexico, 1870-1940

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  • André Martínez

Abstract

This paper studies the historical origins of the federalist institutions in Mexico and Brazil. Using a bargaining game model, I argue that the type of commodities each country produced by the end of the nineteenth Century determined the negotiation power of local governments. This led to the buildup of opposite federalist institutions in both countries, which have persisted until nowadays. The model shows that countries with regions with more autonomy to produce and trade their commodities increase the local power to collect more taxes. While in Brazil coffee was the most important commodity, Mexico relied on mining products. Coffee was produced by local landowners who became economically powerful and they were able that export taxes were collected locally with the proclamation of the 1891 Constitution. Empirical estimates show that, after 1891, exporter states increased significantly their own fiscal revenue. On the other hand, mining was capital and technology intensive, inputs that were domestically scarce in Mexico. To finance those activities foreign investment was promoted centrally, weakening the relative power of local elites.

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File URL: http://www.banxico.org.mx/publicaciones-y-discursos/publicaciones/documentos-de-investigacion/banxico/%7B9B00006C-0EAC-D949-0C8C-564BE136006A%7D.pdf
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Bibliographic Info

Paper provided by Banco de México in its series Working Papers with number 2011-06.

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Date of creation: Sep 2011
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Handle: RePEc:bdm:wpaper:2011-06

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Web page: http://www.banxico.org.mx
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Keywords: Institutions; Fiscal Federalism; Public Finance and Endowments.;

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  1. Daron Acemoglu & Simon Johnson & James A. Robinson, 2001. "The Colonial Origins of Comparative Development: An Empirical Investigation," American Economic Review, American Economic Association, vol. 91(5), pages 1369-1401, December.
  2. Richard M. Bird & Jorge Martinez-Vazquez & Benno Torgler, 2004. "Societal Institutions and Tax Effort in Developing Countries," International Tax Program Papers 0411, International Tax Program, Institute for International Business, Joseph L. Rotman School of Management, University of Toronto.
  3. Rafael La Porta & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert Vishny, 1998. "The Quality of Goverment," NBER Working Papers 6727, National Bureau of Economic Research, Inc.
  4. Dominik H. Enste & Friedrich Schneider, 2000. "Shadow Economies: Size, Causes, and Consequences," Journal of Economic Literature, American Economic Association, vol. 38(1), pages 77-114, March.
  5. Friedrich Schneider & Dominik Enste, 2000. "Shadow Economies Around the World," IMF Working Papers 00/26, International Monetary Fund.
  6. Arzaghi, Mohammad & Henderson, J. Vernon, 2005. "Why countries are fiscally decentralizing," Journal of Public Economics, Elsevier, vol. 89(7), pages 1157-1189, July.
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