The Politics of Taxation in Argentina and Brazil in the Last Twenty Years of the 20Th Century

THE POLITICS OF TAXATION IN ARGENTINA AND BRAZIL IN THE LAST TWENTY YEARS OF THE 20TH CENTURY DISSERTATION Presented in Partial Fulfillment of the Requirements for the Degree Doctor of Philosophy in the Graduate School of The Ohio State University By Hiram José Irizarry Osorio, B.S. & M.A. ***** The Ohio State University 2005 Dissertation Committee: Approved by: Professor R. William Liddle, Adviser ___________________________ Professor Richard P. Gunther Adviser Professor Marcus Kurtz Graduate Program in Political Science ABSTRACT What explains changes in tax policy and its direction and magnitude? More specifically, what explains changes in taxation centralization, progressivity, and level? This dissertation addresses these questions in a comparative way, by studying Argentina and Brazil’s taxation experiences during the 1980s and 1990s. The main reason for choosing these two cases derives from the occurrence of tax policy reforms in both cases, but different in extent and nature, which is the central explanatory concern of this dissertation. Throughout the literature, explanations of change have had a focus on crisis environments, crisis events, and/or agency. Although all of them present some truth and leverage in order to gain an understanding of change taking place, some middle-range explanation is lacking. By this I mean, crises based explanations remain at a high structural level of explanation, while agency based explanations become extremely micro-focused. Though crises present windows of opportunity for changes to take place, they do not guarantee them. Furthermore, changes still have taken place without crises. Thus, crises-based explanations are not necessary or sufficient type of explanations of ii change. They mainly present a possibility that could be taken advantage of by the relevant actors. On the other extreme, without an adequate account of actions, nothing can be explained, since any type of social scientific explanation should be agency grounded. Nevertheless, agency or will of actors (individual or collective) need to be structured or processed through existing institutions, since doing otherwise would portray an atomic individualistic interaction, which besides not being representative of reality, does not help us explain real changes. A combination of macro and micro-concerns are then crucial in order to understand and be able to explain change. This is why middle-range or institutionally based explanations, which contain generalizable qualities without being aloof to contingent and contextual characteristics, are best suited for explaining change. Throughout this dissertation, I present a contingent application of veto players theory in order to explain changes in taxation. It gives importance to strategic actors’ interactions and their institutional realities. I put forth the necessity of a reduction of effective veto players in order for change to take place within a realm of multiple veto players. Furthermore, I argue that without a reduction in the effective number of veto players, change cannot take place; this is an explanation taking into consideration structural and agency considerations. It is not a sufficiency argument because in the end, purposive action is required and agency iii becomes relevant in order to supply this information. Even more, sufficiency is only achieved contingently and contextually. A low number of veto players, present a higher probability of change taking place, at least structurally, but these veto players’ interests need to be taken into consideration in order to understand change or its absence (i.e. agency). This dissertation undertakes a detailed comparative qualitative analysis of taxation’s behavior during the 1980s and 1990s in Argentina and Brazil. I argue that due to a reduction of veto players during the late 1980s, change took place in both cases, but to different extent and nature. The reason for their divergences, I argue, is the different nature of the respective veto players’ reductions and the prevailing interests after these temporary reductions. The result of the analysis is that Argentina and Brazil decreased the progressive capacity of their taxation. This was so because they increased their total taxing capacity without improvements (even worsening) of their distributive justice taxing qualities, since their increased taxing capacities were based on an increased reliance on taxes with less insurmountable solutions for collective action dilemmas ( indirect or consumption taxes). Furthermore, Argentina and Brazil decreased the progressive relevance of their taxation because they decreased (or maintained) their central governments’ relevance based on a relative increase of the ratio of consumption to income taxation. iv In terms of cross-sectional comparisons, Brazil had a less progressive taxation level than Argentina throughout these two decades. Brazil had a greater taxing capacity than Argentina based on worse distributive justice qualities, since the relative distance between income and consumption taxation was greater in Brazil and toward the consumption side. There was no significant identifiable difference in progressive taxation relevance between Argentina and Brazil but Brazil has consistently given more relevance to income and consumption taxation than Argentina when analyzed them individually. An important question of interest that remains open is what explains differences in absolute values of taxation outcomes. This question was relevant throughout the analysis presented, but not addressed since further research was needed. I propose ways of how to undertake such research with respect to Argentina and Brazil. In addition, I propose a quantitative cross-sectional time series analysis to extrapolate and generalize the undertaken Argentine and Brazilian taxation analysis. It is a statistical analysis, which would be essential for properly testing hypotheses of change, direction, and magnitude of the dependent variables: tax policy centralization, progressivity, and level. Even though I addressed several questions, I close this dissertation with another set of questions. The empirical and theoretical puzzle with which I close this dissertation is: Argentina and Brazil do not deviate from the accepted taxation literature of a positive v correlation between development level and taxation level, but the same relation cannot be used to differentiate Argentina and Brazil; Brazil should have had a lower taxation level than Argentina, but this has not been the case throughout history. Why? What explains this partial deviation? Nevertheless, this remains another project! vi DEDICATION ¡Para mi hermano Javier! Por los viejos tiempos, el tiempo transcurrido y el poder seguir disfrutando y compartiendo nuestro decorrer de vida a pesar de la distancia geográfica, que ha bifurcado y bifurca nuestros respectivos decorreres vivenciales. vii ACKNOWLEGEMENTS What about hope, faith, and love? Nothing worth doing can be accomplished in one lifetime, therefore, we must be saved by hope. And, nothing that is true or good or beautiful makes complete sense in any immediate context of history, therefore, we must be saved by faith. And, no act, however virtuous, can be accomplished alone, therefore, we must be saved by love. (Theologian Reinhol Niebuhr quoted in Franklin (2003)) What about sacrifice and happiness? What about self-interest and altruism? In order to increase the satisfaction for the mass of our people and all people, someone must sacrifice something of his own happiness. This is a duty only to those who recognize it as a duty. It is silly to tell intelligent human beings, be good and you will be happy. The truth is today, be good, be decent, be honorable, and self-sacrificing and you will not always be happy. You will often be desperately unhappy. You may even be crucified, dead, and buried. And the third day, you will be just as dead as the first. But, with the death of your happiness, may easily come increased happiness, and satisfaction, and fulfillment for other people…strangers, unborn babes, uncreated worlds. If this is not sufficient incentive, never try it and remain among the hogs. (W.E.B. Du Bois quoted in Franklin (2003) Without hope, faith, and sacrifice you would not be reading this document. Nevertheless, that hope, faith, and sacrifice, although individual, was only possible because of the love I got, received, and found from a variety of sources that provided the energy, happiness, viii and enthusiasm for going on and culminating this project. To these sources of love and support I proceed now in order to acknowledge them and show appreciation. I need to start thanking my family in general for their concern and support throughout the long years of graduate work: my sister Ednita and my brother Javier José, for their constant preoccupation and interest in my Ph.D. status; my father’s, Hiram José Irizarry Colón, overall concern in my well-being and specially in any financial necessities that could arise; my brother Daniel who collaborated in my teaching by sharing his time and talent as an actor by performing short political plays in my courses and interacting with students afterwards; and my mother, Edna Osorio Vélez, for her constant support, understanding, and love throughout this long journey. And to all of them, and the rest of my family, for constantly demonstrating their care and underscoring how proud they are of me. Your constant cheering has meant a lot for me and served as fuel in order to keep on going. That fuel

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