Introduction

The importance of taxation to the economic development of Latin America can hardly be exaggerated. Economist Albert Fishlow (1990, 62), one of the foremost experts on the economies of the subcontinent, does not go astray when he writes that “th. principal economic problem confronted by the countries of the region [Latin America] has been a fiscal shortfall, not massive inefficiency problems resulting from misallocation of resources” (my emphasis). The low tax effort of most nations in the region has historically proven very damaging to their ability to successfully manage their economies. The inability of governments to rely on a solid and adequate source of domestic revenue has severely constrained policy choices, and often forced them to choose between the Charybdis of foreign debt and the Scylla of the inflation tax as sources of state finance. Fiscal inadequacy has made it more difficult for countries in the region to adjust effectively to changing external economic circumstances. No less importantly, it has constrained them from making the crucial public investments that are essential for economic development—from education to infrastructure.