The Politics of Revenue-Raising Tax Reform in Latin America
Total Page：16
File Type：pdf, Size：1020Kb
The Politics of Revenue-Raising Tax Reform in Latin America by Tasha Ann Fairfield A dissertation submitted in partial satisfaction of the requirements for the degree of Doctor of Philosophy in Political Science in the Graduate Division of the University of California, Berkeley Committee in charge: Professor Ruth B. Collier, Co-Chair Professor David Collier, Co-Chair Professor Kent Eaton Professor Emmanuel Saez Spring 2010 The Politics of Revenue-Raising Tax Reform in Latin America © 2010 by Tasha Ann Fairfield Abstract The Politics of Revenue-Raising Tax Reform in Latin America by Tasha Ann Fairfield Doctor of Philosophy in Political Science University of California, Berkeley Professor Ruth B. Collier, Co-Chair Professor David Collier, Co-Chair Increasing tax revenue is imperative for development and good governance in Latin America. Governments throughout the region experienced continued revenue needs in the aftermath of market-oriented tax reforms implemented in the 1980s and early 1990s, yet tax policy outcomes varied widely, across countries, over time and across tax policy areas. This study explains variation in governments’ tax reform agendas and the fate of reform proposals in Chile, Argentina, and Bolivia by analyzing the power of business, a key actor in tax politics in highly unequal societies. Many taxes directly or indirectly affect profits, and business associations may defend the interests of upper-income individuals as well as corporations. The classic concepts of structural power and instrumental power elaborate distinct means of business influence. Structural power arises from a perceived threat that a policy will lead to inadequate investment via market signals. Instrumental power entails deliberate political actions. Sources of instrumental power include relationships with decision-makers and resources that help business pressure policymakers more effectively. When either type of power is strong, taxing elites will be difficult, and reforms that policymakers view as desirable may even be eliminated from the agenda. In Chile, strong instrumental power kept significant tax increases off the agenda. Weaker business power in Argentina gave governments more leeway to increase taxation at the cross- sectoral level, although some powerful sectors prevented tax increases with sector-specific impact. Bolivia is a rare case where business’s substantial power was challenged by counter- mobilization on tax issues and a radical threat from popular sectors to the existing political and economic system. The analysis is based on 82 tax proposals embedded in 48 reform packages. Cases in which policymakers decided not to propose tax reforms they viewed as important are also examined. Primary data sources include interviews with high-level government and tax agency officials, politicians, and business leaders, as well as congressional records, newspaper articles, tax agency reports, and tax return statistics. This research provides insights on building state extractive capacity, which has received insufficient attention in political science. It also contributes to theory on business politics by specifying mechanisms through which economic elites influence policy in democratic societies, observable sources of their power, and government strategies that can attenuate their influence on taxation. 1 Table of Contents Chapter 1. Introduction …… 1 First-Generation Tax Reforms and Their Aftermath …… 3 Continued Revenue Shortfalls …… 3 Regressive Tax Systems …… 6 The Rationale for Progressive Taxation …… 7 Raising Revenue with Progressive Direct Taxes …… 7 Progressive Taxation’s Direct Contribution to Redistribution …… 11 Second-Generation Reforms: Tapping Under-Taxed Elite Resources …… 14 Explaining the Tax Reform Agenda and the Fate of Reform Proposals …… 15 Research Design, Methods, and Data …… 18 Case Selection …… 18 Countries …… 18 Reform Proposals …… 21 Methods for Causal Inference …… 22 Data Sources …… 23 Overview …… 24 Chapter 2. Business Power, Government Reform Strategies, and Alternative Explanations …… 27 Instrumental Power …… 27 Sources of Instrumental Power: Relationships with Decision-Makers …… 30 Recruitment and Informal Ties …… 31 Institutionalized Consultation …… 33 Partisan Linkages …… 34 Sources of Instrumental Power: Resources …… 35 Cohesion …… 35 Technical Expertise …… 36 Preferential Media Access …… 37 Money and Financial Contributions …… 38 Structural Power …… 39 The Relationship Between Instrumental Power and Structural Power …… 42 Government Strategies for Reform …… 45 Tax-Side Strategies …… 46 Attenuating Impact …… 46 Obfuscating Incidence …… 47 Legitimating Appeals …… 48 Vertical Equity …… 49 Horizontal Equity …… 51 Nationalism …… 51 Benefit-Side Strategies …… 52 Compensation …… 52 Emphasizing Stabilization …… 53 Linking to Social Spending …… 54 Dividing and Conquering …… 55 Overview of Reform Strategies …… 56 Alternative Explanations …… 58 Business Power …… 58 Rival Instrumental Power Hypothesis: Cohesion Facilitates Elite Taxation …… 58 Structural Power Hypothesis: Capital Mobility Leads to Reduced Taxation …… 60 Discursive Power …… 61 i Non-Business Actors …… 62 International Factors …… 63 IMF Conditionality …… 64 Epistemic Communities …… 64 Pressures from Other International Actors …… 65 Institutional Explanations …… 66 Federalism …… 66 Institutional Instability …… 68 Chapter 3. Corporate Taxation in Chile: Strong Instrumental Power Restricts the Government’s Agenda …… 70 The Rationale for Increasing the Corporate Tax …… 72 Business’s Weak Structural Power …… 74 Business’s Strong Instrumental Power …… 75 Cross-Sectoral Cohesion …… 76 Partisan Linkages and Informal Ties to Right Parties …… 77 Business as a Core Constituency of the Right Parties …… 77 The Right’s Strength in the Senate …… 80 Government-Business Concertation …… 82 Other Sources of Instrumental Power …… 83 Restricting the Agenda: Mechanisms and Case Studies …… 84 The 2000 Anti-Evasion Reform …… 85 The 2001 Corporate Tax Increase …… 86 Corporate Tax Non-Reform, 2003 and 2005 …… 88 The 1990 Reform in Retrospect: A Unique Business-Right Compromise …… 90 Continuity and Change: Corporate Tax Non-Reform Under Bachelet (2006-2009) …… 93 New Factors Discouraging Corporate Tax Reform …… 93 Instrumental Power: the Continued Strength of Partisan Linkages …… 97 The Right’s Continued Strength in Congress …… 97 Business as the Right’s Less Overt Core Constituency …… 98 An Exception that Highlights the Rule: Business-Right Fissures on Accelerated Depreciation …… 100 The Continued Need and Limited Prospects for Income Tax Reform …… 101 Conclusion …… 102 Postscript: President Piñera’s Unexpected 2010 Reform Initiative …… 103 Chapter 4. Incremental Tax Increases in Chile: Executive Strategies, Business and Legislator Responses, and Reform Outcomes …… 108 Introduction ……. 108 The Concertación’s Strategy Repertoire …… 108 Chapter Overview ……. 112 Part 1: The 2001 Anti-Evasion Reform …… 116 An Inopportune Context for Raising Taxes …… 116 Reform Design and Strategies for Managing Opposition …… 118 Successes and Limitations of the Anti-Evasion Reform Design and Appeals to Equity …… 120 The Outcome: A Revenue-Raising Success …… 124 Pending Tax Issues …… 125 Part 2: The 2003 VAT Increase in Comparative Perspective: Linking Taxes that Lack Inherent Legitimacy to Spending …… 130 The 2003 VAT Increase …… 130 ii Revenue Needs and Limited Funding Options ……. 130 Linking to Spending and Emphasizing Fiscal Discipline …… 131 Minimal Conflict with Business at the Cost of Concertación Discontent and Right Attacks …… 132 Strategic Errors and Sub-Optimal Spending Program Characteristics …… 134 Preserving the VAT Increase in 2006 …… 135 Linking Regressive Taxes to Progressive Spending During the Frei Administration …… 136 1995 Excise Tax Increases to Fund Pensions ……. 136 The 1997 VAT Increase to Fund Educational Reform ……. 137 Comparative Perspective …… 139 Part 3: Addressing the Problem of Under-Taxation of the Mining Sector …… 142 The Causes of Under-Taxation in the Mining Sector …… 142 Obstacles to Reform: Instrumental Power and Institutional Constraints …… 143 Successive Reform Attempts: the Search for a Politically Feasible Solution, 1998-2001 …… 144 Building Momentum for Reform: High Profile Tax Avoidance and Parliamentary Activism …… 145 Executive Response: From Avoiding Conflict with Business To Endorsing the Royalty …… 146 The 2004 Royalty Proposal …… 147 Reform Design and Executive Strategies …… 148 The Failure of the Royalty …… 149 The 2005 Specific Tax on Mining …… 151 Success: Pre-Electoral Timing Forces Business and the Right to Compromise …… 151 The Outcome: Modest Revenue at the Cost of Major Conflict and No Future Tax Increases …… 153 Part 4: Eliminating “57 bis,” a Regressive Income Tax Benefit …… 155 The Tax Benefit for Stock Market Investors …… 155 Business’s Instrumental Power Prevents Reform During the 1990s …… 156 Opportunity for Reform: Electoral Competition from the Right on Reducing Inequality …… 158 The Limits to Equity-Enhancing Reform in 2005 …… 160 Impetus for Future Reform …… 162 Part 5: Restricting a Regressive VAT Credit for Construction of Homes …… 163 The Special VAT Regime for Construction of Homes …… 163 Business Power and Internal Divisions Keep Reform Off the Agenda, 2000-2007 …… 164 The Construction Sector’s Strong Instrumental Power …… 164 The Construction Sector’s Occasional Structural Power …… 165 Restricting the Agenda ...... 166 Parliamentary Activism: Laying the Groundwork for Reform …… 166 The 2008 Reform: Linking to Popular