Development in the Americas (DIA)
IDB Flagship Publication
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More than Revenue: Taxation as a Development Tool
Taxation in Latin America is largely viewed as a means of generating income to keep the government in business. In recent years, progress has been made towards increasing total revenue, but most countries in the region still lag well behind other countries with similar levels of development. More importantly, Latin America policymakers still largely ignore the potential of taxation to contribute to other important development goals. Governments have repeatedly missed the chance to influence consumption and production patterns by using taxes to effect relative price changes. More than Revenue aims to provide an up-to-date overview of the current state of taxation in the Latin American and Caribbean (LAC) region, its main reform needs, and possible reform strategies that take into account the likely economic, institutional, and political constraints on the reform process.
Working Papers and Technical Notes
- (In)Formal and (Un)Productive: The Productivity Costs of Excessive Informality in Mexico
- Does Inequality Breed Altruism or Selfishness? Gauging Individuals' Predispositions towards Redistributive Schemes
- Economic Crisis and Fiscal Reforms in Latin America
- Employment and Taxes in Latin America: An Empirical Study of the Effects of Payroll, Corporate Income and Value-Added Taxes on Labor Outcomes
- Is there an anti-labor bias in Latin American tax policies?
- Manna from Heaven: The Impact of Nonrenewable Resource Revenues on Other Revenues of Resource Exporters in Latin America and the Caribbean
- More than Revenue: Main Challenges for Taxation in Latin America and the Caribbean
- On the Role of Productivity and Factor Accumulation in Economic Development in Latin America and the Caribbean
- Reducing Reliance on Natural Resource Revenue and Increasing Subnational Tax Autonomy in Bolivia
- Structural Reforms in Brazil: Progress and Unfinished Agenda
- Sub-national Revenue Mobilization in Latin America and Caribbean Countries: The Case of Venezuela
- Sub-national Revenue Mobilization in Peru
- Tax Efforts in the Mexican States
- Tax Expenditure Budgets: Concepts and Challenges for Implementation
- The Effects of Oil and Mineral Taxation on Non-commodity Fiscal Revenues
- The Political Economy of Fiscal Reform in Brazil: The Rationale for the Suboptimal Equilibrum
- The Political Economy of Fiscal Reform in Latin America: The Case of Argentina
- When Should Developing Countries Announce Their Climate Policy?
- Why Don’t We Tax the Rich? Inequality, Legislative Malapportionment, and Personal Income Taxation around the World
- Workable Environmentally Related Energy Taxes
Abstract: The laws that regulate relations between firms and workers in Mexico distinguish sharply between salaried and non-salaried workers, and they are at the root of the existence of informality. This paper provides a clear definition of informality, distinguishing it from illegality. Using Mexico’s Economic Census, the paper shows that the majority of firms are informal but legal, that there are more small formal firms than large ones, and that some large firms are informal. It also shows that informality and illegality increased in the period 1998-2008. Using a simple model of monopolistic competition to measure the productivity losses due to distortions that misallocate resources, the paper finds that one peso of capital and labor allocated to formal and legal firms is worth 28 percent more than if allocated to illegal and informal firms, and 50 percent more than if allocated to legal and informal firms. The paper concludes arguing that the distortions in the labor market created by informality reduce total factor productivity. Click here for more information.
Abstract: While decreasing inequality is generally considered desirable, and there is a growing understanding of which policies do and do not promote equality, much less is known regarding why these policies are adopted to varying degrees of intensity in different times and places. To explain this variation, the constituencies for different policies under various conditions must be identified. This paper explores that question using Brazilian public opinion data on preferences regarding taxation, conditional cash transfers, pension schemes and educations. It is found that disagreement across socio-economic groups arises on how government should address inequality rather than whether it should do so. While poorer respondents support cash transfers more than the rich, the rich are more likely than the poor to support expenditures on public education. Contrary to what is commonly assumed, inequality seems to breed altruism among the rich regarding the quintessential poverty reduction scheme of conditional cash transfers. Click here for more information.
Abstract: The recent financial crisis has initiated pressures for not only policy reform but also fundamental institutional fiscal reforms. This paper explores the connection between economic crises and fiscal institutional reforms in a region that has experienced plenty of both in recent years, namely Latin America. For that purpose it reviews the literature and provides five hypotheses about why, and under what circumstances, crises would promote reforms. The empirical evidence shows that debt crises make reforms more likely but banking crises on their own, if anything, reduce the pressure for fiscal institutional reforms. Political institutions are also important. If the electoral system encourages the personal vote, the country is more likely to reform. This evidence may become useful for predicting the likelihood of reforms in the developed world. Click here for more information.
Abstract: This paper empirically explores the effects of payroll taxes, value-added taxes and corporate income taxes on a variety of labor market outcomes such as employment, unemployment, informality, and wages. Using national-level data on labor variables for 15 Latin American countries, the results indicate that the effects of each tax are distinctly different and may depend on several aspects of labor and tax institutions. Payroll taxes reduce employment and increase labor costs when their benefits are not valued by workers, but otherwise increase labor participation and do not raise labor costs. Value-added taxes increase informality and reduce skilled labor demand. In contrast, corporate income taxes may help reduce informality, especially among low-education workers but, when tax enforcement capabilities are strong, may reduce labor participation and employment of medium- and high-education workers. Click here for more information.
Abstract: Payroll taxes along with minimum wages have derived in a remarkable increase in labor costs in Latin America since the nineties. Given that, simultaneously, corporate taxation rates have dropped, this study analyzes the probability of a resulting anti-labor taxing bias in Latin American countries. An accounting approach is used which allows calculating the effective rates of taxation for both work and capital and then comparing them. As in developed countries, tax burdens in Latin America are biased against labor income in the sense that the effective rates on labor taxes (both direct and payroll) are greater than the effective rates on capital taxes. Among the countries analyzed in the study, Venezuela, Guatemala, Colombia and Brazil display the greatest anti-labor biases. Click here for more information.
Abstract: This paper examines the impact of the availability of fiscal revenues from nonrenewable resources on other revenues of Latin American and Caribbean resource-exporting countries. It compares the performance of nonresource revenues in these countries to that in other countries in the region. The effect of resource revenue on nonresource revenue is found to be negative and statistically significant, with structural breaks both over time and across countries. Nonresource revenues have risen considerably, but they are still lower on average than in comparator countries, and the wedge between both groups of countries has widened over time. They also tend to be more volatile. The paper also analyzes the composition of nonresource revenues. It finds that the performance of VAT and nonresource income taxes of resource exporters has been similar to that of other countries, but revenues from other taxes (including excises) have been lower. The paper's findings have important policy implications. Especially for resource exporters with fiscal vulnerabilities to shocks and sustainability issues, strengthening nonresource revenues would be important to create adequate fiscal space to meet expenditure needs. Oil exporters should also consider phasing out their costly, inefficient, and poorly targeted petroleum subsidies, with compensating measures to protect vulnerable groups. Click here for more information.
Abstract: This paper aims to provide an overview of the current state of taxation in the Latin America and Caribbean (LAC) region, and its main reform needs and options. It previews the findings of recent studies prepared or commissioned by the Inter-American Development Bank (IDB) for its forthcoming flagship publication More than Revenue: Taxation as a Development Tool in the -Development in the Americas- series. Reflecting fiscal consolidation imperatives, the main objective of fiscal policies in the region in recent decades has been revenue mobilization, often at the expense of efficiency and equity objectives. This paper analyzes the region’s taxation in regard to revenue adequacy, efficiency, vertical and horizontal equity, ease of administration and compliance, and degree of fiscal decentralization, concluding that there is significant scope for reforms that would result in simultaneous improvement on several of these fronts. Although the paper does not provide a specific blueprint for reforms, which would need to be designed on a country-by-country basis, it identifies directions for reform that are relevant for most of the region. Click here for more information.
Abstract: This paper combines development and growth accounting exercises with economic theory to estimate the relative importance of total factor productivity and the accumulation of factors of production in the economic development performance of Latin America. The region’s development performance is assessed by contrast with various alternative benchmarks, both advanced countries and peer countries in other regions. The paper finds that total factor productivity is the predominant factor: low productivity and slow productivity growth, as opposed to impediments to factor accumulation, are the key to understanding Latin America’s low income relative to developed economies and its stagnation relative to other developing countries. While policies easing factor accumulation would help somewhat in improving productivity, for the most part, closing the productivity gap requires productivity-specific policies. Click here for more information.
Abstract: This paper address options for restructuring the revenue system of Bolivia’s subnational governments, particularly prefectures, emphasizing reduction of dependence on natural resources and strengthening of subnational tax autonomy. The paper additionally identifies tax instruments or tax bases that could be assigned exclusively to regional governments or shared with the central government, assessing their main advantages and disadvantages through a simulation of revenue generation. The results show that several options exist for increasing the tax autonomy of local governments. The tax instruments proposed in this paper carry relatively low administrative costs. In fact, the taxes proposed would not require the establishment of new agencies but could be collected by existing agencies and, in the case of energy and fuel taxes, by producing and distributing firms. Click here for more information.
Abstract: This paper discusses Brazil’s structural reforms since the 1990s and areas where work remains to be done. Reforms of the 1990s included the containment of inflation, the adoption of a comprehensive Fiscal Responsibility Law, a successful debt restructuring program for subnational governments, the reduction of trade barriers, a wave of privatizations, and the expansion of health and education programs. Reforms of the 2000s included strengthening welfare programs, rapidly increasing the minimum wage, and reforming the financial sector to increase access to credit among lower income groups. Political opposition and other factors, however, have prevented reforms in the tax and pension systems and in the labor market. Brazil’s recent strong economic performance owes more to generally sound macroeconomic management, and to a favorable external environment, than to a comprehensive and sustained structural reform effort. Doubts remain about the country’s ability to sustain high growth rates while keeping inflation low. Click here for more information.
Abstract: This paper analyzes the high fiscal dependence of Venezuelan states and municipalities on the central government and the political economy process embedded in the interaction between the central government and sub-national entities. Also explored is whether there is scope to increase sub-national governments’ revenues, improve the current intergovernmental transfer system, and reduce horizontal imbalances; of particular importance is analyzing the impact of current transfer mechanisms on sub-national governments’ revenues volatility. Following a presentation of Venezuela’s economic background, public sector and fiscal variables, the paper describes the process of decentralization, inter-governmental transfer mechanisms and revenue volatility, and local governments’ own revenues. Subsequently presented are sub-national governments’ fiscal dependence and its determinants, followed by options for revenue mobilization and improving the transfer mechanism. The paper concludes with a summary and policy recommendations. Click here for more information.
Abstract: This paper analyzes the problem of sub-national revenue mobilization in Peru and proposes several policy reforms to improve collection performance while maintaining a sound revenue structure. In particular, the paper analyzes the current revenues of regional and municipal governments and identifies the main priorities for reform. Among the most important problems are the acute inequalities and inefficiencies associated with revenue sharing from extractive industries. These revenues represent a significant share of sub-national budgets and currently they are distributed without consideration of the relative expenditure needs or fiscal capacity of sub-national units. In order to address this problem, the paper proposes the incorporation of a measure of fiscal capacity into the formula of the FONCOMUN, the municipal equalization transfer program. Other reforms explored include the reassignment of revenue sources between municipal provincial and district governments and the assignment of new taxes to regional governments. Click here for more information.
Abstract: Given the high dependence on transfers from the federal government, it has traditionally been argued that there reigns a low fiscal effort among the Mexican states. This is a partial approach as a comprehensive assessment of the fiscal performance must be associated to its tributary potential in order to establish whether the administration fittingly leverages its tax-collecting capacity. By applying two methodological proposals to consider the state’s fiscal effort, the Tax Effort Rate (TER) and the Fiscal Potential Usage Rate (FPUR), this article advances in the calculation of the tax effort throughout the Mexican states. In addition, by using panel models, it evaluates the factors that explain the differing fiscal efforts between states. The results show that the approach followed to estimate the tax effort affects the assessment of the inter-state tax management disparity. While the output level per capita, the degree of labor informality and the political affiliation of the governor explain the horizontal imbalances of the FPUR, the transfers determine the TER. The comparison of expected and actual collection of the main generator of tax revenue in the states, the payroll tax, indicates that, in added terms, the tax-collecting effort is close to its potential and, thus, there is limited fiscal room to increase the collection of this duty. A greater state tax effort should focus on the other taxes which fall under their management as well as on exploiting the delegation of certain taxes imposed by the federal government. Click here for more information.
Abstract: Tax expenditures are generally defined as those government expenditures carried out through tax legislation, regulations, and practices that reduce or defer taxes for some taxpayers. There is a general concern that the tax expenditures negatively affect the budget and tax policies, which in turn affect the transparency, efficiency, and equality of the fiscal systems. Many countries in Latin American and a few in the Caribbean already estimate their tax expenditures; but in many cases they do so without adopting a consistent methodology that allows for adequate comparisons or that even evaluates their effectiveness. This working paper discusses the conceptual aspects of tax expenditures, the main challenges to assess them, and the general procedures adopted in the OECD countries and Latin America and the Caribbean to calculate, present, and approve them. Click here for more information.
Abstract: This paper shows, first, that non-commodity revenues are more volatile in oil- and mineral-rich countries and that quality of institutions is associated with lower volatility. We investigate the channels through which oil and mineral revenue volatility lead to non-commodity revenues volatility, and find that when oil and fiscal revenues increase (decrease), non-commodity revenues are reduced (increased) discretionally, and that this substitution effect is larger and faster than an indirect positive income effect through increased public expenditures and GDP. Latin American oil- and mineral-rich countries appear, though, to behave differently. In particular, most of them show increased non-commodity revenues pari passu with increased oil and mineral revenues during the last decade. These findings have consequences for the overall volatility of public expenditures and the effectiveness of automatic tax stabilizers in oil- and mineral-rich countries. Click here for more information.
Abstract: This project examines fiscal reforms in Brazil since the 1990s, particularly in taxation, budgeting, and fiscal federalism. While recentralizing fiscal authority and massively expanding the extractive capacity of the state, policymakers chose not to revamp an inefficient tax system that has nonetheless proven capable of generating high levels of revenue. In budgeting, the economic crises of the mid-1990s prompted the government to rein in subnational fiscal imbalances but discouraged policymakers from introducing major changes in the tax system. As the executive derives utility from fiscal stability and inflation control because of electoral incentives and credibility gains in international markets, reform initiatives can generate political benefits for incumbent politicians. The paper finally argues that the Achilles’ heel of the sustainability of the Fiscal Responsibility Law is its enforcement technology: the -Tribunais de Contas-. Click here for more information.
Abstract: This paper investigates the political economy of fiscal reform activism in Argentina since the late 1980s. Between 1988 and 2008, tax legislation was changed 83 times, fiscal federal rules 14 times, and budgetary institutions sixteen times. Tax and budgetary reforms moved from centralizing revenue sources and spending authority in the federal government to mild decentralization lately. Fiscal federal rules combined centralization of revenues and management in the federal government with short-term compensations for the provinces. This paper contends that reform activism can be explained by the recurrence of economic and policy shocks while reform patterns may be accounted for as consequences of the decreasing political integration of national parties in a polity whose decisionmaking rules encourage the formation of oversized coalitions. The decrease in political integration weakened the national party leaderships’ ability to coordinate intergovernmental bargaining, and strengthened the local bosses and factions needed to form oversized coalitions. Click here for more information.
Abstract: This paper provides a rationale for developing countries to announce future credible commitments to reduce GHG emissions even if these are not to materialize in the short run, and for domestic reasons only. A simple framework is presented in which it is shown that it may be costly for an economy to transition from high to low emissions; and that, if climate policy eventually will be enacted, then it may be better for countries to commit earlier and therefore eliminate the uncertainty for the private sector to invest appropriately in clean technologies. In particular, conditions are shown under which the private investor prefers a pre-announced climate policy, and how this policy affects investment decisions and the deployment of clean technologies. Click here for more information.
Abstract: This paper argues that the details of political institutions help explain the low levels of personal income taxation. In particular, legislative malapportionment enables rich elites to exercise disproportionate political influence. Because over-represented districts tend to be dominated by parties aligned with the elite, these groups can block legislative attempts to introduce progressive taxes. Using a sample of more than 50 countries (including 17 across Latin America) between 1990 and 2007, this paper finds that i) countries with historically more unequal distributions of wealth and income systematically present higher levels of legislative malapportionment, and ii) higher levels of malapportionment are associated with lower shares of personal income taxes in GDP.present higher levels of legislative malapportionment, and ii) higher levels of malapportionment are associated with lower shares of personal income taxes in GDP. Click here for more information.
Abstract: This paper models an energy tax reform process out of a status quo and towards environmentally related excises, distinguishing between uniform and non-uniform tax components, positive and normative tax structures, and adopting a non- Ramsey specification. The model is implemented for Argentina, Bolivia and Uruguay, and a rebalancing of fuel taxes is found where gasoline and diesel are the main drivers, due in part to higher estimates of the environmental costs of diesel relative to gasoline than those found in Parry and Strand (2010) for Chile. Environmental (mostly local) gains of the reform are significant, while fiscal impacts are positive and large. They do not, however, include double dividend effects because of price increases in widespread energy inputs triggered by the reform exercise. The tax reform has a positive distributive impact in Uruguay, while large pre-existing price distortions tend to produce negative impacts in Argentina and Bolivia. Click here for more information.
|Fiscal Resources Dataset |
Content: This technical note is intended to serve as a guide in the generation of the database associated to document "Manna from Heaven: The Impact of Non-renewable Resource Revenues (NRR) on Other Revenues of Resource Exporters in Latin America and the Caribbean”. Basically, the database focuses on the construction of the tax revenues and the main macroeconomic data within 8 Latin-American countries while trying to maintain comparability among them. Additionally, the tax revenues are broken down into two components: depending on whether or not they are derived from non-renewable natural resources (hereinafter referred to as "resources"). Years Covered: 1992-2010. Click here for more information.
|Latin America and the Caribbean Fiscal Burden Database |
Content: This comprehensive database, produced by the Inter-American Center of Tax Administrations (CIAT) and the Inter-American Development Bank (IDB), provides detailed yearly series on taxes, social security contributions and other fiscal revenues for 21 countries of Latin America and the Caribbean. Click here for more information.
Taxation in Latin America and the Caribbean: Myth versus Reality
More than Revenue: Taxation as a Development Tool
Taxation for Development: A Reform Agenda
Photographs provided by Meredith Pierce, Wilson Center.
CNN Dinero: Tax Systems in Latin America
May 23, 2013
- IDB: Taxation is not everything (in Spanish)
Portafolio.co, September 16, 2013
- Brasil: Brasileiros são os latino-americanos que mais pagam impostos (in Portuguese)
Jornal Nacional, May 15, 2013
- Brasil: Imposto de trabalhadores de mesma renda pode variar até 10 vezes, diz BID (in Portuguese)
Folha de São Paulo, May 15, 2013
- Brasil: Brasil deveria simplificar sistema tributário, diz BID (in Portuguese)
Valor Econômico, May 15, 2013
- Brasil: Brasil e Argentina têmos maiores impostos da América Latina (in Portuguese)
Revista Exame, May 15, 2013
- Colombia: Impuestos no llevan al desarrollo regional
Globoeconomía, May 15, 2013
- Colombia: BID sugiere pensar en reformas fiscales inteligentes
Portafolio, May 15, 2013
- Paraguay: Paraguay es uno de los países que más gastan para recaudar, según el BID
Ultima Hora, May 15, 2013
- Chile: BID destaca régimen tributario favorable para la minería y tasa casi "óptima" en combustible
DF.CL, May 15, 2013
- Uruguay: BID: exoneración de IVA a productos básicos beneficia más a ricos que a pobres
La Red21, May 15, 2013
- Jamaica: IDB Study Urges Regional Gov´t To Modernise Taxation
The Gleaner, May 15, 2013
- Paraguay: Sistema tributario paraguayo, entre los más rápidos
La Nación, May 16, 2013
- Spain: El BID sugiere una reforma fiscal para garantizar el desarrollo en América Latina
El País, May 15, 2013
- Spain: BID insta a modernizar sistema fiscal para mejorar productividad en América Latina
Agencias ABC, May 15, 2013
- Spain: BID insta a modernizar sistema fiscal para mejorar productividad en América Latina
Agencia EFE, May 15, 2013
- Latin America tax revenue cut by evasion, write-offs -IADB
Reuters, May 15, 2013
- BID advierte la necesidad de realizar reformas fiscales para impulsar el desarrollo de América Latina
Iberoamérica Central de Noticias, May 15, 2013
- Impuestos pierden potencial como motor de desarrollo en Latinoamérica
Terra.com, May 15, 2013
Development in the Americas is the flagship publication of the Inter-American Development Bank. Every year, the Bank researches and provides an in-depth analysis of the most pressing development issues in Latin America and the Caribbean.
Editions of Development in the Americas (DIA):
More than Revenue: Taxation as a Development Tool
More than Revenue aims to provide an up-to-date overview of the current state of taxation in the Latin American and Caribbean (LAC) region, its main reform needs, and possible reform strategies that take into account the likely economic, institutional, and political constraints on the reform process.
Room for Development: Housing Markets in Latin America and the Caribbean
This edition of the IDB's flagship publication, Development in the Americas, takes an in-depth look at the opportunities countries have to improve urban housing markets and pave the way for solutions that involve the private sector.
Unveiling the Impact of New Information Technologies
Policymakers and academics agree that computers, the Internet, mobile telephones and other information and communication technologies can be beneficial for economic and social development. But how strong is the impact?
The Age of Productivity: Transforming Economies
from the Bottom Up
The book provides tools to ponder productivity growth beyond conventional aggregate analysis, focusing on the extreme heterogeneity of sectors and firms while emphasizing the importance of policies that allow high productivity firms to thrive and expand.
Beyond Facts: Understanding Quality of Life
Using an enhanced version of the recently created Gallup World Poll, the Inter-American Development Bank surveyed people from throughout the region and found that perceptions of quality of life are often very different from the reality.
Previous editions of the Economic and Social Progress Report (IPES):
Outsiders? The Changing Patterns of Exclusion in Latin America and the Caribbean
This report raises a number of fundamental questions about the multidimensional and interrelated nature of social exclusion and moves beyond the traditional emphasis on outcomes and groups to view exclusion as a process that results from societal traits that limit the functionings of the excluded.
Living with Debt: How to Limit the Risks of Sovereign Finance
This report analyzes the nature and evolution of sovereign debt in Latin America and discusses the policies that can be followed by countries and international financial institutions (IFIs) to reduce the vulnerabilities associated with it.
The Politics of Policies
Certain simple ideas can help to mobilize society, but they are rarely sufficient for understanding the processes of fundamental change. Sadly, there are no shortcuts to the Promised Land of sustainable development and prosperity for all.
The Quest for Deep and Stable Bank Lending
Unfortunately, credit is scarce, expensive, and volatile. Without deep and stable credit markets, it will be very difficult for the region to achieve high and sustainable growth rates and combat poverty.
Good Jobs Wanted: Labor Markets in Latin America
Topics of the Report include the employer-worker dynamic, the new profile of the supply of labor, the impact of structural reforms, and the role of technology and institutions.
The New Regionalism in Latin America
It focuses on current subregional integration schemes, the new agenda launched in Doha for multilateral trade talks, regional initiatives, and interregional agreements between countries in the region and the European Union.
Competitiveness: The Business of Growth
This report provides guidelines to increase productivity and improve access by businesses to productive resources.
Development Beyond Economics
This report examines three entrenched structural factors -demography, geography and institutions- that are closely connected to economic and social development.
Facing Up to Inequality in Latin America
Latin America in the 1990s remains the most unequal region in the world in terms of income distribution. Yet because of its changing demographics the region now has a unique window of opportunity to reduce the income gap by accelerating the development process, putting people to work, improving education, and saving for the future.
Latin America After a Decade of Reforms
This report examines the complex forces that have shaped the reform process and assesses the challenges ahead to sustain economic growth, prevent instability, improve income distribution, and foster participation in public decisionmaking.
Making Social Services Work
The 1996 Report on Economic and Social Report in Latin America interprets these macroeconomic developments in light of structural reforms implemented across the region over the past decade.