PROGRESSIVE TAX REFORM AND EQUALITY IN LATIN AMERICA EDITED BY James E. Mahon Jr. Marcelo Bergman Cynthia Arnson WWW.WILSONCENTER.ORG/LAP THE WILSON CENTER, chartered by Congress as the official memorial to President Woodrow Wilson, is the nation’s key nonpartisan policy forum for tackling global issues through independent research and open dialogue to inform actionable ideas for Congress, the Administration, and the broad- er policy community. Conclusions or opinions expressed in Center publications and programs are those of the authors and speakers and do not necessarily reflect the views of the Center staff, fellows, trustees, advisory groups, or any individu- als or organizations that provide financial support to the Center. Please visit us online at www.wilsoncenter.org. Jane Harman, Director, President and CEO BOARD OF TRUSTEES Thomas R. Nides, Chair Sander R. Gerber, Vice Chair Public members: William Adams, Acting Chairman of the National Endowment for the Humanities; James H. Billington, Librarian of Congress; Sylvia Mathews Burwell, Secretary of Health and Human Services; G. Wayne Clough, Secretary of the Smithsonian Institution; Arne Duncan, Secretary of Education; David Ferriero, Archivist of the United States; John F. Kerry. Designated appointee of the president from within the federal government: Fred P. Hochberg, Chairman and President, Available from: Export-Import Bank of the United States Latin American Program Private Citizen Members: John T. Casteen III, Charles E. Cobb Jr., Woodrow Wilson International Center for Scholars Thelma Duggin, Lt. Gen Susan Helms, USAF (Ret.), Barry S. Jackson, One Woodrow Wilson Plaza Nathalie Rayes, Jane Watson Stetson 1300 Pennsylvania Avenue NW Washington, DC 20004-3027 WILSON NATIONAL CABINET: Ambassador Joseph B. Gildenhorn & Alma Gildenhorn, Co-chairs www.wilsoncenter.org/lap Eddie & Sylvia Brown, Melva Bucksbaum & Raymond Learsy, Paul & Rose Carter, Armeane & Mary Choksi, Ambassadors Sue & Chuck Cobb, Lester © 2015, Woodrow Wilson International Center for Scholars Crown, Thelma Duggin, Judi Flom, Sander R. Gerber, Harman Family Foundation, Susan Hutchison, Frank F. Islam, Willem Kooyker, Linda B. & Design and Layout: Station 10 Creative, Columbia, MD, USA Tobia G. Mercuro, Dr. Alexander V. Mirtchev, Thomas R. Nides, Nathalie Rayes, Wayne Rogers, B. Francis Saul II, Ginny & L. E. Simmons, Diana Davis ISBN: 978-1-938027-43-7 Spencer, Jane Watson Stetson, Leo Zickler Acknowledgments This book represents the culmination of the Latin American Program’s three-year project on the politics of progressive taxation in Latin America. We are grateful to the Tinker Foundation for its generous support of this initiative. We are also grateful to numerous colleagues from throughout the region who have contributed their expertise at various stages of the project, either as conference participants at events sponsored by the Woodrow Wilson International Center for Scholars in 2011 and 2012 or as authors of pre- viously published case studies: José Roberto Afonso, Martín Ardanaz, Alberto Barreix, Carlos Elizondo, Laura Frigenti, Juan Carlos Gómez Sabaini, Juan Pablo Jiménez, Stephen Kaplan, Santiago Levy, Eduardo Lora, Nora Lustig, Marcus Melo, Gabriel Ondetti, Natalia Salazar, Saulo Santos de Souza, John Scott, and Vito Tanzi. Their comments, perspectives, and advice have greatly enriched our inquiry. In 2013 and 2014, we collaborated with institutions in Mexico, Costa Rica, and Colombia in sponsoring regional forums on tax reform. For their leadership and cooperation in these joint efforts, we express our thanks to Hugo Beteta, of the Comisión Económica para América Latina y el Caribe, in Mexico; to Jorge Vargas Cullell, of Programa Estado de la Nación, and to Armando González, of La Nación, in Costa Rica; and to Leonardo Villar, of Fedesarrollo, in Colombia. Colleagues too numerous to mention in all four institutions provided indispensable help in organiz- ing the conferences and issuing the resulting publications; to them we owe a collective word of thanks. v Acknowledgments Finally, we owe our deepest thanks to Verónica Colón-Rosario, program Contents associate of the Latin American Program, for her research assistance and oversight of all phases of the project’s implementation. Cynthia J. Arnson Marcelo Bergman James E. Mahon Jr. December 2014 Introduction 1 James E. Mahon Jr. and Marcelo Bergman, with Cynthia J. Arnson CHAPTER 1: The Political Economy of Progressive Tax Reform in Chile 30 Tasha Fairfield Commentary: Bachelet’s Tax Reform— 57 Some Preliminary Thoughts Francisco Rosende CHAPTER 2: The Uruguayan Tax Reform of 2006: Why Didn’t it Fail? 64 Andrés Rius CHAPTER 3: The Political Economy of Colombia’s 2012 and 101 2014 Fiscal Reforms Gustavo A. Flores-Macías vi vii Contents CHAPTER 4: Institutions, Inequality, and Taxes in Guatemala 127 Maynor Cabrera and Aaron Schneider Commentary: Improving Guatemala’s Tax System 152 Foundation for the Development of Guatemala (FUNDESA) and Coordinating Committee of Agricultural, Commercial, Industrial, and Financial Associations (CACIF) CHAPTER 5: The Political Economy of Progressive Tax Reforms in Mexico 161 Vidal Romero Conclusion 189 James E. Mahon Jr. and Marcelo Bergman, with Cynthia J. Arnson Contributors 200 viii INTRODUCTION The Political Economy of Progressive Tax Reform in Latin America—Comparative Context and Policy Debates James E. Mahon Jr. and Marcelo Bergman, with Cynthia J. Arnson Over the course of more than a generation of vibrant and mostly uninterrupt- ed electoral democracy, Latin American governments have done almost noth- ing about the fact that the region suffers from the highest levels of inequality, on average, in the world.1 On the spending side, what little has been done has been quite innovative, and this has brought new attention to redistribution through programs such as conditional cash transfers and universal noncon- tributory pensions, which have been credited by some with a small but mea- surable improvement in equality in several countries since about 2000.2 But taxation across the region is still generally regressive, relying greatly on revenue from consumption taxes and (with a handful of minor exceptions) hardly at all on revenue from personal income taxes. The long coexistence in the region of elected governments, enormous inequality, and inattention to progressive tax- ation ought to puzzle us—and not just because it directly violates the expecta- tions of the most widely cited model of the political economy of taxation.3 The background papers and case studies of the Latin American Program’s Project on Taxation and Equality can be found at http://wilsoncenter.org/publication-series/taxation. Thanks to Richard Bird for generous and perceptive comments on a draft of this introduction. 1 The Political Economy of Progressive Tax Reform in Latin America James E. Mahon Jr. and Marcelo Bergman, with Cynthia J. Arnson However, more recently, and especially since the Uruguayan tax PROGRESSIVE TAX REFORM reform of 2006, some policymakers have in fact begun to consider what might be done on the revenue side of the ledger to address inequality. We begin by defining progressive tax reform. We consider a reform “pro- The Chilean tax reform of 2014 is the best example. Still, progressive tax gressive” insofar as it shifts the tax burden, on average, toward wealthier measures have faced a variety of obstacles, as we discuss in more detail households and away from poorer ones. Now, admittedly it has been hard below, including the doubts of some experts and practitioners about their to calculate tax incidence with a great deal of confidence, especially in a effectiveness or political feasibility. Hence the questions: What kinds of region as data-poor as Latin America, leading scholars to rely often on esti- reforms would be economically efficient, effective at redistribution, and mates of the net incidence of a package of policy measures. And even the politically possible? And what conditions and strategies might be most best post hoc calculations of a reform’s effect will be confounded by many conducive to such reforms? simultaneous changes. Still, based on several decades of estimates, we feel This book seeks to answer these questions, in pursuit of two objectives. justified in considering net relative increases in the revenue burden carried The first is to update the literature on tax reform in Latin America by focus- by personal income and property taxation (especially on real estate) to be ing on how progressive tax reforms take place, with special reference to impor- progressive, and net relative increases in revenue from consumption taxa- tant recent examples of success and failure in this regard. The second is to tion, especially on basic necessities, to be regressive.4 We will also refer to glean advice for reformers, drawn from the same literature and examples, income taxes on firms and payroll taxes from time to time. However, the emphasizing factors that are within the control of policymakers. The litera- incidence of the former is still disputed, despite a large scholarly literature, ture on tax reform in the region has produced a large volume of work on the even with regard to countries with better data than those discussed here.5 optimal design of reform from an economic and administrative standpoint. The latter is an important issue, which has recently entered the conversation But much less has been done on the determinants of reform, especially on because of its likely impact on the demand for