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Taxation in Latin America: Reflections on Sustainability and the Balance between Equity and Efficiency

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  • Richard M. bird

    () (International Tax Program, Rotman school of Management, University of Toronto)

Abstract

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.”

Suggested Citation

  • Richard M. bird, 2003. "Taxation in Latin America: Reflections on Sustainability and the Balance between Equity and Efficiency," International Tax Program Papers 0306, International Tax Program, Institute for International Business, Joseph L. Rotman School of Management, University of Toronto.
  • Handle: RePEc:ttp:itpwps:0306
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    File URL: http://www-2.rotman.utoronto.ca/iib/ITP0306.pdf
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    References listed on IDEAS

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    Cited by:

    1. Odd-Helge Fjeldstad & Mick Moore, 2007. "Taxation and State Building: Poor Countries in a Globalised World," CMI Working Papers 11, CMI (Chr. Michelsen Institute), Bergen, Norway.
    2. Richard M. Bird & Jorge Martinez-Vazquez & Benno Torgler, 2014. "Societal Institutions and Tax Effort in Developing Countries," Annals of Economics and Finance, Society for AEF, vol. 15(1), pages 301-351, May.
    3. Hallerberg, Mark & Scartascini, Carlos, 2017. "Explaining changes in tax burdens in Latin America: Do politics trump economics?," European Journal of Political Economy, Elsevier, vol. 48(C), pages 162-179.
    4. repec:clh:resear:v:3:y:2010:i:10 is not listed on IDEAS
    5. Richard Bird & Jorge Martinez-Vazquezb & Benno Torgler, 2007. "Tax Effort: The Impact of corruption, Voice and Accountability," International Tax Program Papers 0702 Classification - JEL, International Tax Program, Institute for International Business, Joseph L. Rotman School of Management, University of Toronto.
    6. Rodrigo Cubero & Ivanna Vladkova Hollar, 2010. "Equity and Fiscal Policy; The Income Distribution Effects of Taxation and Social Spending in Central America," IMF Working Papers 10/112, International Monetary Fund.
    7. Jorge Martinez-Vazquez, 2011. "Municipal Finances in Latin America: Features, Issues, and Prospects," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper1107, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
    8. Lora, Eduardo, 2008. "El futuro de los pactos fiscales en América Latina," Coediciones, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL), number 1310, April.
    9. Richard Bird & Christine C.P.Wong, 2005. "China's Fiscal System: A Work in Progress (2005)," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper0520, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
    10. Michael Smart, 2006. "The GST Cut and Fiscal Imbalance," International Tax Program Papers 0604, International Tax Program, Institute for International Business, Joseph L. Rotman School of Management, University of Toronto.
    11. Richard M. Bird, 2006. "Taxing Land and Property in Emerging Economies: Raising Revenue...and More?," International Tax Program Papers 0605, International Tax Program, Institute for International Business, Joseph L. Rotman School of Management, University of Toronto.
    12. Christine C.P. Wong & Richard M. Bird, 2005. "China?s Fiscal System: A Work in Progress," International Tax Program Papers 0515, International Tax Program, Institute for International Business, Joseph L. Rotman School of Management, University of Toronto.
    13. Kenneth L. Sokoloff & Eric M. Zolt, 2007. "Inequality and the Evolution of Institutions of Taxation: Evidence from the Economic History of the Americas," NBER Chapters,in: The Decline of Latin American Economies: Growth, Institutions, and Crises, pages 83-138 National Bureau of Economic Research, Inc.

    More about this item

    Keywords

    Taxa; Latin America; equity; efficiency;

    JEL classification:

    • O23 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Fiscal and Monetary Policy in Development
    • O54 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Latin America; Caribbean
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General

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