ECONOMIC POWER AND POLITICAL INFLUENCE: BUSINESS GROUPS AND TAXATION IN LATIN AMERICA by Néstor Castañeda-Angarita B.A. Economics, Universidad Nacional de Colombia, 2001 M.A. Latin American Studies, University of Texas at Austin, 2007 Submitted to the Graduate Faculty of the Kenneth P. Dietrich School of Arts and Sciences in partial fulfillment of the requirements for the degree of Doctor of Philosophy University of Pittsburgh 2014 UNIVERSITY OF PITTSBURGH KENNETH P. DIETRICH SCHOOL OF ARTS AND SCIENCES This dissertation was presented by Néstor Castañeda-Angarita It was defended on April, 2014 and approved by Barry Ames, Andrew Mellon Professor, Political Science Scott Morgenstern, Associate Professor, Political Science Marla Ripoll, Associate Professor, Economics Advisor: Aníbal Pérez, Associate Professor, Political Science ii Copyright © by Néstor Castañeda-Angarita 2014 iii ECONOMIC POWER AND POLITICAL INFLUENCE: BUSINESS GROUPS AND TAXATION IN LATIN AMERICA Néstor Castañeda-Angarita, PhD University of Pittsburgh, 2014 The influence of organized business interests in the fiscal policymaking is understudied. A long tradition of research has studied the emergence of business interest groups, their political activity, and their role within democratic political systems. Some scholars have offered theories of about the relationship between government and business, and the implications of the varieties of capitalism for the design of welfare policies. Empirical research on lobbying activity and campaign contributions is also extensive and offers evidence that money buys political access and influence. However, it is still unclear how exactly business interest groups shape fiscal policy outcomes and under which particular conditions they are more successful than politicians and technocrats in shaping tax policy outcomes. This dissertation argues that cross-country variation in tax policy outcomes mainly depends on two factors: the agenda-setters' fiscal policy preferences and the patterns of business organization. I develop a theory of tax policy change that builds on the existing literature on iv business interest groups, but incorporates the patterns of business organization as a crucial factor in explaining fiscal policy choice. This theory suggests that if there is no convergence between the policy preferences of agenda-setters and business interest groups, the latter will display their economic and political power in order to avoid increases in direct taxation and transfer any costs of fiscal consolidation to consumers or non-organized citizens by increasing value-added taxes or other indirect taxes. In particular, I suggest that market power, centralized business organization, and policy integration altogether make business interest groups more effective for lobbying activities, and consequently, more influential for tax policy decision-making. The rationale of the theory is straightforward. Both, agenda-setters and business interest groups, have distinctive preferences over types of taxation (direct vs. indirect), tax rates (corporate, income, value-added taxes, etc.), tax bases, and tax administration (centralized, state- level, local-level, etc.). Agenda-setters' tax policy preferences are usually partisan-oriented and depend on the characteristics of the government coalition. Business interest groups usually prefer lower corporate tax rates, and their preferences about personal income and value-added taxes are ambiguous. If their preferences do not converge and both, agenda-setters and business interest groups, follow their most preferred policies, the feasibility of tax reforms will depend on business interests groups' market power (diversification of the economy) and their organizational capacity to coordinate firms, industry-level organizations, or economic conglomerates. Tax policy outcomes will vary as the patterns of business organization range from (multi-sector) centralized national associations to sector-oriented associations, or considerable intra-business competition (pluralism). Consequently, the relative success of revenue-raising tax reforms varies as a function of the business interest groups' market power and organizational capacity, and their conditional effect on the agenda-setters' policy preferences. v Overall, this dissertation finds support for strong and systematic links between patterns of business organization and tax reforms. Additionally, I present empirical evidence that contradicts the widespread argument that agenda-setters are the predominant actors for economic policy- making in presidential regimes. In fact, I find that non-institutional actors or de-facto veto players have substantial influence on fiscal policy outcomes. These findings enrich political economy theories of democratic governance by modeling the role of business interest groups in policymaking and its implications for policy change. This dissertation not only offers a new theoretical approach but also new methodological tools to understand how business interest groups are actually influential for policymaking. Finally, this dissertation also makes an important empirical contribution for the study of business politics beyond the limited sample of developed countries. vi TABLE OF CONTENTS LIST OF TABLES ....................................................................................................................... X LIST OF FIGURES .................................................................................................................... XI ACKNOWLEDGEMENTS ..................................................................................................... XII 1. INTRODUCTION .................................................................................................................. 1 1.1. INSTITUTIONS AND FISCAL GOVERNANCE ................................................................................ 7 1.2. THE ARGUMENT IN BRIEF ................................................................................................................ 13 1.3. PLAN OF THE DISSERTATION ......................................................................................................... 17 PART I. THEORY AND EMPIRICAL IMPLICATIONS .................................................... 20 2. A THEORY OF TAX POLITICS ...................................................................................... 21 2.1. FISCAL POLICY CHOICE .................................................................................................................... 22 2.2. ACTORS IN TAX POLICYMAKING ................................................................................................. 25 2.2.1. THE AGENDA SETTERS .............................................................................................................................................. 26 2.2.2. BUSINESS INTEREST GROUPS ................................................................................................................................... 35 2.2.2.1. Market Leverage................................................................................................................................................... 37 2.2.2.2. Business Coordination ........................................................................................................................................ 39 2.3. THE POLITICS OF REVENUE-RAISING TAX REFORMS ....................................................... 50 2.3.1. THE CAUSAL MECHANISM: MODELING TAX POLICY CHANGE ............................................................................... 53 2.3.2. BRIEF ILLUSTRATIONS OF THE CAUSAL MECHANISM .......................................................................................... 59 2.4. CONCLUDING REMARKS................................................................................................................... 62 vii 3. BUSINESS ORGANIZATION AND TAX POLITCS IN LATIN AMERICA .............. 63 3.1. DEPENDENT VARIABLE: TAX POLICY IN LATIN AMERICA ............................................. 64 3.1.1. TAX REVENUES ............................................................................................................................................................ 65 3.1.2. DIRECT VS. INDIRECT TAXES .................................................................................................................................... 69 3.1.3. TAX RATES ................................................................................................................................................................... 76 3.2. INDEPENDENT VARIABLES .............................................................................................................. 80 3.2.1. FISCAL POLICY PREFERENCES .................................................................................................................................. 80 3.2.2. PATTERNS OF BUSINESS ORGANIZATION ................................................................................................................ 84 3.2.2.1. Business Interest Groups’ Market Leverage ............................................................................................... 84 3.2.2.2. Business Coordination ........................................................................................................................................ 88 3.2.3. PRESIDENT’S PARTISAN POWERS ............................................................................................................................ 97