This paper explores in some aspects of the complex balancing act needed to achieve economically and politically sustainable tax systems in Latin America. By a “sustainable” tax system I mean one that is sufficiently congruent with prevailing economic and political factors in a country to persist without the need for repeated major “reforms.” Specifically, my thesis is that one key to achieving a sustainable tax system is to strike the right “balance” between the equity and efficiency aspects of taxation in terms of the equilibrium of political forces. Experience suggests that any state that wishes to both grow and to implement redistributive fiscal policies -- whether the aim be much or little redistribution -- must first establish an administrable and efficient tax system. At the same time, however, to make such a system politically sustainable, it must be considered “fair” by a majority of the politically relevant population. One reason why many countries in Latin America do not appear to have either an efficient or a fair tax system is essentially because of the very limited scope of this segment of the population, so that the politically relevant “domain” of the fiscal system is considerably smaller than the population as a whole. Some specific suggestions are made in the paper with respect to how both the efficiency and the equity outcomes of Latin American tax systems might be improved. My general conclusion, however, is that a more democratic and sustainable outcome cannot, as it were, be induced by better fiscal institutions. On the contrary, a more encompassing and legitimate state is itself the key ingredient needed for a more balanced and sustainable tax system. Countries with similar economic characteristics in similar economic situations can and do have and sustain very different tax levels and structures, reflecting their different political situation. In a variant of a phrase currently popular in the literature of political economics, when it comes to tax matters, in general “politics rule.”
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Paper provided by International Tax Program, Institute for International Business, Joseph L. Rotman School of Management, University of Toronto in its series International Tax Program Papers with number
0306.
Find related papers by JEL classification: O23 - Economic Development, Technological Change, and Growth - - Development Planning and Policy - - - Fiscal and Monetary Policy in Development O54 - Economic Development, Technological Change, and Growth - - Economywide Country Studies - - - Latin America; Caribbean H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
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B. Douglas Bernheim, 1999.
"Taxation and Saving,"
NBER Working Papers
7061, National Bureau of Economic Research, Inc.
[Downloadable!] (restricted)
Other versions:
B. Douglas Bernheim, 1999.
"Taxation and Saving,"
Working Papers
99007, Stanford University, Department of Economics.
[Downloadable!]
Bernheim, B. Douglas, 2002.
"Taxation and saving,"
Handbook of Public Economics,
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Elsevier.
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