The politics of tax reform in Latin America

Abstract

This paper seeks to understand why the Latin American states used to have, in general terms, more limited capacity to tax their citizens than other countries with similar income per capita, preferring to rely on the inflationary tax. In less than a decade, however, as a response to the economic crisis of the 1980s and in the midst of a process of democratization, many of these states have conducted a programme of economic liberalization which has included a successful tax reform and consequently a better record on inflation. This paper will argue that the specific package of economic reforms including privatization, liberalization, deregulation and the contraction of real salaries were a necessary condition for reforming the tax system, as it enabled the state elite to reach an agreement with the largest businessmen. Privatization and the contraction of real wages were also crucial to controlling public spending and stabilizing the economy. The stabilization of the economy helped to justify tax reform. This paper will study how tax reform was achieved and with what implications with respect to the stability of tax reform in particular and of economic liberalization in general. This paper will also try to asses how the current democratization process is linked to tax reform.