the policy making process of tax reform in latin america

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The Policy Making Process of Tax Reform The Policy Making Process of Tax Reform in Latin Americain Latin America

Mauricio CárdenasMauricio CárdenasEduardo LoraEduardo LoraValerie Mercer-BlackmanValerie Mercer-Blackman

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OutlineOutline

1.1. IntroductionIntroduction

2.2. Tax Policy OutcomesTax Policy Outcomes

3.3. Key PlayersKey Players

4.4. The PMPThe PMP

5.5. Tax Policies’ Outer FeaturesTax Policies’ Outer Features

6.6. Empirical EvidenceEmpirical Evidence

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OutlineOutline




4.4. The PMPThe PMP



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1. Introduction1. Introduction

• Tax Reform / Tax Policy are ideal candidates for the Tax Reform / Tax Policy are ideal candidates for the PMP methodologyPMP methodology

• Outcome of complex intertemporal exchangesOutcome of complex intertemporal exchanges

• Large number of actorsLarge number of actors

• Good and successful tax policy is less about Good and successful tax policy is less about content and more about its outer features. (e.g. the content and more about its outer features. (e.g. the ability to sustain agreements to raise taxation)ability to sustain agreements to raise taxation)

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OutlineOutline




4.4. The PMPThe PMP



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2. Tax Policy Outcomes2. Tax Policy Outcomes

• Increase tax revenues (at low Increase tax revenues (at low administrative cost)administrative cost)

• Improve tax neutralityImprove tax neutrality• Facilitate tax administrationFacilitate tax administration• Little emphasis on progressivity.Little emphasis on progressivity.

The objectives of the reforms proposed The objectives of the reforms proposed by governmentsby governments

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Import liberalization and Import liberalization and globalization trends conditioned globalization trends conditioned tax reformstax reforms

Tariff Liberalization, Latin AmericaTariff Liberalization, Latin America

00

55

1010

1515

2020

2525

3030

3535

4040

4545

5050

19851985 19861986 19881988 19901990 19921992 19931993 19941994 19951995 19961996 19971997 19981998 11999999

Average deviation 10 countriesAverage deviation 10 countries

Average tariff 12 countriesAverage tariff 12 countries

Note: The average of twelve countries includes Argentina, Bolivia, Brasil, Chile, Colombia, Costa Rica, Ecuador, Guatemala, Mexico, Peru, Uruguay and Venezuela. In calculating the deviation, Costa Rica and Guatemala are excluded for lack of data. The value of the tariff deviation for 1985 is assumed to be the same as that of the next year.

Source: IDB Research Department WP 466. See Appendix 1.

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Lower income rates, higher VAT ratesLower income rates, higher VAT rates

Tax Rates: Value-Added Tax, Personal Income Tax, Corporate Income Tax*Tax Rates: Value-Added Tax, Personal Income Tax, Corporate Income Tax*

20%20%

25%25%

30%30%

35%35%

40%40%

45%45%

50%50%

19851985 19861986 19871987 19881988 19891989 19901990 19911991 19921992 19931993 19941994 19951995 19961996 19971997 19981998 19991999 20002000 20012001 20022002

Ind

ivid

ual an

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orp

ora

tion

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Ind

ivid

ual an

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orp

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's T

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12%12%

13%13%

14%14%

15%15%

16%16%

VA

T T

ax R

ate

VA

T T

ax R

ate

LAC Personal Income Tax Rate (Avg.) Left Scale

LAC Corporate Income Tax Rate (Avg.) Left Scale

LAC VAT Rate (Avg.) Right scale

Source: PriceWaterHouseCoopers: Individual Taxes and Corporation Taxes. Worldwide Summaries. Several years

(*) Includes Argentina, Brazil, Chile, Colombia, Costa Rica, Ecuador, El Salvador, Guatemala, Honduras, Jamaica, Mexico, Nicaragua, Paraguay, Peru, República Dominicana, Trinidad and Tobago, Uruguay and Venezuela.

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Personal income tax rates Personal income tax rates have fallen in have fallen in allall countries countries

CountryCountry 19851985 19901990 19951995 20002000 20022002

ArgentinaArgentina 45%45% 30%30% 30%30% 35%35% 35%35%BoliviaBolivia 30%30% 10%10% 13%13% 13%13% 13%13%BrazilBrazil 60%60% 25%25% 35%35% 28%28% 28%28%ChileChile 50%50% 50%50% 45%45% 45%45% 40%40%ColombiaColombia 49%49% 30%30% 35%35% 35%35% 35%35%Costa RicaCosta Rica 50%50% 25%25% 25%25% 25%25% 25%25%EcuadorEcuador 40%40% 25%25% 25%25% 25%25% 25%25%El SalvadorEl Salvador 60%60% 50%50% 30%30% 30%30% 30%30%GuatemalaGuatemala 48%48% 34%34% 30%30% 31%31% 31%31%HondurasHonduras 46%46% 46%46% 46%46% 25%25% 25%25%JamaicaJamaica 58%58% 33%33% 25%25% 25%25% 25%25%MéxicoMéxico 55%55% 35%35% 35%35% 40%40% 40%40%NicaraguaNicaragua 53%53% 30%30% 25%25% 25%25%ParaguayParaguay 30%30% 30%30% 0%0% 0%0% 0%0%PeruPeru 50%50% 45%45% 30%30% 20%20% 27%27%Dominican RepublicDominican Republic 73%73% 73%73% 25%25% 25%25% 25%25%Trinidad and TobagoTrinidad and Tobago 70%70% 35%35% 38%38% 35%35% 35%35%UruguayUruguay 0%0% 0%0% 0%0% 0%0% 0%0%VenezuelaVenezuela 45%45% 45%45% 34%34% 34%34% 34%34%

Personal Income Tax RatesPersonal Income Tax Rates

Source: PriceWaterHouseCoopers: Individual Taxes. Worldwide Source: PriceWaterHouseCoopers: Individual Taxes. Worldwide Summaries. Several yearsSummaries. Several years

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Similarly for corporate Similarly for corporate income tax ratesincome tax rates

CountryCountry 19851985 19901990 19951995 20002000 20022002

ArgentinaArgentina 33%33% 20%20% 30%30% 35%35% 35%35%BoliviaBolivia 30%30% 0%0% 25%25% 25%25% 25%25%BrazilBrazil 45%45% 40%40% 25%25% 25%25% 25%25%ChileChile 10%10% 10%10% 15%15% 15%15% 16%16%ColombiaColombia 40%40% 30%30% 35%35% 35%35% 35%35%Costa RicaCosta Rica 50%50% 30%30% 30%30% 30%30% 30%30%EcuadorEcuador 40%40% 25%25% 25%25% 25%25% 25%25%El SalvadorEl Salvador 35%35% 30%30% 25%25% 25%25% 25%25%GuatemalaGuatemala 42%42% 34%34% 25%25% 31%31% 31%31%HondurasHonduras 46%46% 46%46% 40%40% 25%25% 25%25%JamaicaJamaica 45%45% 33%33% 33%33% 33%33% 33%33%MéxicoMéxico 42%42% 36%36% 34%34% 34%34% 35%35%NicaraguaNicaragua 45%45% .... 30%30% 25%25% 25%25%ParaguayParaguay 30%30% 30%30% 30%30% 30%30% 30%30%PeruPeru 55%55% 35%35% 30%30% 20%20% 27%27%Dominican RepublicDominican Republic 49%49% 49%49% 25%25% 25%25% 25%25%Trinidad and TobagoTrinidad and Tobago 50%50% 40%40% 38%38% 35%35% 35%35%UruguayUruguay 30%30% 30%30% 30%30% 30%30% 30%30%VenezuelaVenezuela 50%50% 50%50% 34%34% 34%34% 34%34%

Source: PriceWaterHouseCoopers: Corporate Taxes. Worldwide Summaries. Several yearsSource: PriceWaterHouseCoopers: Corporate Taxes. Worldwide Summaries. Several years

Corporate Income Tax Rates

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And conversely for VAT And conversely for VAT ratesrates

CountryCountry 19851985 19901990 19951995 20002000 20022002

ArgentinaArgentina 18%18% 13%13% 21%21% 21%21% 21%21%BoliviaBolivia 10%10% 10%10% 13%13% 13%13% 13%13%BrazilBrazil 30%30% 30%30% 31%31% 31%31% 31%31%ChileChile 20%20% 18%18% 18%18% 18%18% 18%18%ColombiaColombia 10%10% 12%12% 14%14% 15%15% 16%16%Costa RicaCosta Rica 10%10% 10%10% 10%10% 13%13% 13%13%EcuadorEcuador 10%10% 10%10% 10%10% 12%12% 12%12%El SalvadorEl Salvador 0%0% 0%0% 13%13% 13%13% 13%13%GuatemalaGuatemala 7%7% 7%7% 7%7% 10%10% 10%10%HondurasHonduras 5%5% 5%5% 7%7% 12%12% 12%12%JamaicaJamaica 0%0% 0%0% 13%13% 15%15% 15%15%MexicoMexico 15%15% 15%15% 15%15% 15%15% 15%15%NicaraguaNicaragua 15%15% 15%15% 15%15% 15%15% 15%15%ParaguayParaguay 0%0% 0%0% 10%10% 10%10% 10%10%PeruPeru 11%11% 16%16% 18%18% 18%18% 18%18%Dominican RepublicDominican Republic 6%6% 6%6% 8%8% 8%8% 8%8%Trinidad and TobagoTrinidad and Tobago 0%0% 15%15% 15%15% 15%15% 15%15%UruguayUruguay 20%20% 22%22% 22%22% 23%23% 23%23%VenezuelaVenezuela 0%0% 0%0% 13%13% 15%15% 15%15%

Source: PriceWaterHouseCoopers: Corporate Taxes. Worldwide Summaries. Several yearsSource: PriceWaterHouseCoopers: Corporate Taxes. Worldwide Summaries. Several years

Value-Added Tax RatesValue-Added Tax Rates

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Personal taxes: Fewer taxpayers, more Personal taxes: Fewer taxpayers, more effective tax rateseffective tax rates

Latin AmericaLatin America 19851985 19911991 19971997 20002000 20012001 19851985 19911991 19971997 20002000 20012001

ArgentinaArgentina 0.80.8 0.50.5 1.21.2 1.31.3 1.71.7 21.421.4 13.713.7 14.514.5 15.515.5 16.516.5BoliviaBolivia 1.01.0 0.50.5 …… …… …… 10.110.1 0.50.5 …… …… ……BrazilBrazil 0.30.3 1.21.2 2.12.1 1.71.7 1.51.5 10.110.1 2.82.8 4.24.2 3.33.3 3.13.1ChileChile 0.20.2 2.32.3 0.10.1 0.10.1 0.10.1 2.82.8 22.622.6 1.31.3 1.21.2 1.21.2ColombiaColombia 0.00.0 0.40.4 2.72.7 4.44.4 4.14.1 20.520.5 25.325.3 12.012.0 11.711.7 16.616.6Costa RicaCosta Rica 1.21.2 2.92.9 1.11.1 0.80.8 0.80.8 1.41.4 5.35.3 5.65.6 4.14.1 3.73.7Dominican RepublicDominican Republic 1.11.1 0.20.2 0.10.1 2.62.6 2.32.3 413.5413.5 74.374.3 34.334.3 6.56.5 5.85.8EcuadorEcuador 0.40.4 2.92.9 1.81.8 0.90.9 2.42.4 29.229.2 35.835.8 22.722.7 11.311.3 8.38.3El SalvadorEl Salvador …… 2.32.3 1.41.4 1.21.2 1.21.2 171.7171.7 32.532.5 12.712.7 11.411.4 11.011.0GuatemalaGuatemala 0.90.9 2.32.3 6.36.3 5.35.3 5.05.0 356.0356.0 31.731.7 17.517.5 14.714.7 22.522.5HondurasHonduras 0.00.0 6.96.9 5.25.2 3.93.9 3.63.6 600.4600.4 686.8686.8 103.4103.4 39.139.1 36.036.0MexicoMexico 0.70.7 0.20.2 0.10.1 0.10.1 0.10.1 21.321.3 11.711.7 5.05.0 36.836.8 44.044.0NicaraguaNicaragua 1.71.7 …… 6.66.6 8.38.3 7.77.7 56.956.9 9.99.9 47.447.4 49.949.9 61.261.2PanamaPanama 0.30.3 0.50.5 0.90.9 0.90.9 0.90.9 89.089.0 97.897.8 63.163.1 58.958.9 57.857.8ParaguayParaguay 0.50.5 …… …… …… …… 10.410.4 …… …… …… ……PeruPeru …… …… 2.62.6 2.82.8 2.92.9 …… …… 20.120.1 21.521.5 22.322.3UruguayUruguay …… …… …… …… …… …… …… …… …… ……VenezuelaVenezuela …… …… 0.00.0 0.00.0 0.00.0 …… …… 0.00.0 0.00.0 0.00.0

0.60.6 1.81.8 2.12.1 2.32.3 2.32.3 121.0121.0 75.075.0 24.224.2 19.019.0 20.720.7

Personal Income Tax Exemption Level and Upper Income Bracket (Multiples of per capita GDP)Personal Income Tax Exemption Level and Upper Income Bracket (Multiples of per capita GDP)

Source: Stotsky, J and A. WodenMariam. IMF Working Paper WP/02/227. Central American Tax Reform: Trends and Source: Stotsky, J and A. WodenMariam. IMF Working Paper WP/02/227. Central American Tax Reform: Trends and PossibilitiesPossibilities

Personal Exemption LevelPersonal Exemption Level Upper Income BracketUpper Income Bracket

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Business taxation: too many Business taxation: too many exemptionsexemptions

CountryCountry Horizontal tax Horizontal tax incentives incentives

Tax incentives to specific sectorsTax incentives to specific sectorsTax incentives Tax incentives

to particular to particular regionsregions

ArgentinaArgentina Mining, forestryMining, forestryBahamasBahamas X X (a)(a) Hotels, financial services, spirits and beerHotels, financial services, spirits and beer

BarbadosBarbados X X (b)(b) Financial services, insurance, information technologyFinancial services, insurance, information technology

BelizeBelize XX MiningMining

BoliviaBolivia MiningMining

BrazilBrazil X X (c)(c)

ChileChile X X (d)(d) Forestry, oil, nuclear materialsForestry, oil, nuclear materials XXColombiaColombia X X (e)(e)

Costa RicaCosta Rica Forestry, tourismForestry, tourism

Dominican RepublicDominican Republic Tourism, agribusinessTourism, agribusiness

EcuadorEcuador Mining, TourismMining, Tourism

El SalvadorEl Salvador

Guatemala Guatemala

GuyanaGuyana AgribusinessAgribusiness

HaitiHaiti X X (f)(f)

HondurasHonduras

JamaicaJamaica Motion picture industry, tourism, bauxite, aluminum, factory Motion picture industry, tourism, bauxite, aluminum, factory constructionconstruction

MexicoMexico XX (g)(g) Forestry, motion picture industry, air and maritime Forestry, motion picture industry, air and maritime

transportation, publishing industrytransportation, publishing industryNicaraguaNicaragua TourismTourism

PanamaPanama Tourism, forestryTourism, forestry

ParaguayParaguay X X (h)(h)XX

(i)(i)

PeruPeru Tourism, mining, oilTourism, mining, oil X X (j)(j)

Trinidad & TobagoTrinidad & Tobago X X (k)(k) Hotels, construction,Hotels, construction,

UruguayUruguay X X (l)(l) Hydrocarbons, printing , shipping, forestry, military Hydrocarbons, printing , shipping, forestry, military industry, airlines, newspapers, broadcasters, theaters, industry, airlines, newspapers, broadcasters, theaters, motion picture industrymotion picture industry

VenezuelaVenezuela X X (m)(m) Hydrocarbons and other primary sectors Hydrocarbons and other primary sectors (n)(n)

Source: IDB 2001. Table 17.3 in The Business of Growth. Economic and Social Progress in Latin America 2001 Report. Source: IDB 2001. Table 17.3 in The Business of Growth. Economic and Social Progress in Latin America 2001 Report.

Financial and Fiscal Incentives to Production and Investment (2000)Financial and Fiscal Incentives to Production and Investment (2000)

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Some progress in tax revenues Some progress in tax revenues (up to 1997)(up to 1997)

Tax Revenues as gdp percentage*Tax Revenues as gdp percentage*

(Average and Median)(Average and Median)

0.10.1

0.110.11

0.120.12

0.130.13

0.140.14

0.150.15

0.160.16

0.170.17

19851985 19861986 19871987 19881988 19891989 19901990 19911991 19921992 19931993 19941994 19951995 19961996 19971997 19981998 19991999 20002000 20012001 20022002

Tax Rev. (Avg.)Tax Rev. (Avg.) Tax Rev. without cycle (Avg.)Tax Rev. without cycle (Avg.)

Tax Rev. (Med)Tax Rev. (Med) Tax Rev. without cycle (Med.)Tax Rev. without cycle (Med.)

Source: IMF. Data from Government Finance Statistics and Article IV. Several Years(*) Includes Argentina, Brazil, Chile, Colombia, Costa Rica, Ecuador, El Salvador, Guatemala, Honduras, Mexico, Nicaragua, Paraguay, Peru, Dominican Republic,

Uruguay and Venezuela.

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Mixed evidence in terms Mixed evidence in terms of revenuesof revenues

CountryCountry 1985-891985-89 1990-941990-94 1995-991995-99 2000-022000-02 2000-02 Vs 2000-02 Vs 1985-891985-89

ArgentinaArgentina 11.6%11.6% 11.6%11.6% 12.5%12.5% 9.5%9.5% -2.1%-2.1%BoliviaBolivia 8.0%8.0% 9.9%9.9% 14.0%14.0% 13.1%13.1% 5.1%5.1%BrazilBrazil 16.5%16.5% 18.2%18.2% 19.7%19.7% 24.4%24.4% 7.9%7.9%ChileChile 19.3%19.3% 18.4%18.4% 18.7%18.7% 16.7%16.7% -2.6%-2.6%ColombiaColombia 11.2%11.2% 11.8%11.8% 10.4%10.4% 12.9%12.9% 1.7%1.7%Costa RicaCosta Rica 20.2%20.2% 18.4%18.4% 17.9%17.9% 12.5%12.5% -7.7%-7.7%EcuadorEcuador 14.4%14.4% 15.5%15.5% 15.0%15.0% 19.2%19.2% 4.8%4.8%El SalvadorEl Salvador 12.3%12.3% 9.8%9.8% 11.6%11.6% 10.8%10.8% -1.5%-1.5%GuatemalaGuatemala 7.9%7.9% 7.4%7.4% 8.9%8.9% 10.2%10.2% 2.3%2.3%HondurasHonduras 13.6%13.6% 15.5%15.5% 16.9%16.9% 16.2%16.2% 2.6%2.6%JamaicaJamaica 23.5%23.5% 21.4%21.4% 22.3%22.3% 25.6%25.6% 2.0%2.0%MéxicoMéxico 14.3%14.3% 13.5%13.5% 11.9%11.9% 12.0%12.0% -2.3%-2.3%NicaraguaNicaragua 25.3%25.3% 11.0%11.0% 13.6%13.6% 14.1%14.1% -11.2%-11.2%ParaguayParaguay 8.5%8.5% 9.4%9.4% 10.6%10.6% 9.7%9.7% 1.2%1.2%PeruPeru 10.8%10.8% 13.4%13.4% 14.8%14.8% 12.6%12.6% 1.9%1.9%Dominican RepublicDominican Republic 11.8%11.8% 13.2%13.2% 14.8%14.8% 15.5%15.5% 3.8%3.8%Trinidad and TobagoTrinidad and Tobago 24.8%24.8% 19.2%19.2% 20.4%20.4% 15.3%15.3% -9.6%-9.6%UruguayUruguay 21.9%21.9% 25.7%25.7% 26.2%26.2% 24.0%24.0% 2.1%2.1%VenezuelaVenezuela 17.0%17.0% 15.9%15.9% 14.1%14.1% 11.9%11.9% -5.1%-5.1%

Source: IMF. Data from Government Finance Statistics and Article IV. Several YearsSource: IMF. Data from Government Finance Statistics and Article IV. Several Years

Tax Revenue as GDP percentageTax Revenue as GDP percentage

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Stability in revenues, Stability in revenues, changes in compositionchanges in composition

ItemItem 1985-19891985-1989 1990-19941990-1994 1995-19991995-1999 2000-022000-02

Total Tax Revenue (% GDP)Total Tax Revenue (% GDP)

LAC average *LAC average * 15.3%15.3% 14.5%14.5% 15.5%15.5% 15.2%15.2%LAC median *LAC median * 13.8%13.8% 13.9%13.9% 14.8%14.8% 13.8%13.8%LAC average (1)LAC average (1) 14.8%14.8% 14.5%14.5% 15.4%15.4% 15.2%15.2%LAC median (1)LAC median (1) 13.7%13.7% 14.0%14.0% 14.9%14.9% 13.8%13.8%

Income Tax Revenue (% GDP)Income Tax Revenue (% GDP)


VAT Tax Revenue (% GDP)VAT Tax Revenue (% GDP)


Source: Own calculations based on IMF. Data from Government Finance Statistics and Article IV. Several YearsSource: Own calculations based on IMF. Data from Government Finance Statistics and Article IV. Several Years

(*) Includes Argentina, Brazil, Chile, Colombia, Costa Rica, Ecuador, El Salvador, Guatemala, Honduras, Jamaica, México, Nicaragua, Paraguay, Peru, (*) Includes Argentina, Brazil, Chile, Colombia, Costa Rica, Ecuador, El Salvador, Guatemala, Honduras, Jamaica, México, Nicaragua, Paraguay, Peru, Dominican Republic, Trinidad and Tobago, Uruguay and Venezuela. Dominican Republic, Trinidad and Tobago, Uruguay and Venezuela.

(1) Includes Argentina, Brazil Chile, Colombia, Costa Rica, Ecuador, Guatemala, Honduras, México, Nicaragua, Peru, Dominican Republic and Uruguay. (1) Includes Argentina, Brazil Chile, Colombia, Costa Rica, Ecuador, Guatemala, Honduras, México, Nicaragua, Peru, Dominican Republic and Uruguay.

Tax RevenuesTax Revenues

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Tax Revenues (% GDP)Tax Revenues (% GDP)

0%0%

2%2%

4%4%

6%6%

8%8%

10%10%

12%12%

14%14%

16%16%

19851985 19861986 19871987 19881988 19891989 19901990 19911991 19921992 19931993 19941994 19951995 19961996 19971997 19981998 19991999 20002000 20012001 20022002

Tax revenue/GDPTax revenue/GDP

Income Tx/GDPIncome Tx/GDP

VAT/GDPVAT/GDP

OtherOther

Source: IMF. Data from Government Finance Statistics and Article IV. Several Years. PriceWaterHouseCoopers: Summaries. Individual Taxes and Corporation Taxes. Worldwide. Several years


Stability in revenues, Stability in revenues, changes in compositionchanges in composition

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The lack of progressivity: much ado The lack of progressivity: much ado about nothing?about nothing?

Year of calculations

Gini before taxes

Revenue (ratio to income or expenditure)

Quasi-Gini of tax

Gini after tax

Gini after tax and

equidistribution of revenue

Kakwani measure

Reynolds Smolensky measure

Engel, Galetovic, Raddatz measure

(a) (b) (c) (d) (e) (f) (d)- (b) (b)- (e) (b)- (f)

Income taxesArgentina: CEB (1997) 1996 0.470 0.050 0.625 0.470 0.438 0.156 0.00008 0.031Chile: Engel et al (1997) 1994 0.543 0.018 0.882 0.543 0.528 0.338 0.00006 0.016Dominican Republic: Santana and Rathe (1992) 1989 0.497 0.038 0.751 0.497 0.469 0.253 0.00010 0.028El Salvador: Acevedo and Orellana (2003) 2000 0.502 0.011 0.645 0.502 0.495 0.143 0.00002 0.007Guatemala: Bahl et al (1996) 1993 0.565 0.014 0.651 0.565 0.556 0.086 0.00001 0.009Honduras: Gómez- Sabaini (2003) 2000 0.539 0.044 0.551 0.539 0.515 0.011 0.00001 0.024Peru: Haughton (2004) 2000 0.470 0.012 0.627 0.468 0.462 0.157 0.00197 0.008Median 0.156 0.00006 0.016

Value-added taxesArgentina: CEB (1997) 1996 0.470 0.062 0.329 0.470 0.449 - 0.141 - 0.00009 0.021Chile: Engel et al (1997) 1994 0.543 0.087 0.454 0.543 0.504 - 0.089 - 0.00008 0.040Colombia: Steiner & Soto (1998) 1994 0.543 0.039 0.592 0.543 0.519 0.050 0.00002 0.023El Salvador: Acevedo and Orellana (2003) 2000 0.502 0.054 0.265 0.502 0.488 - 0.237 - 0.00013 0.014Guatemala: Bahl et al (1996) 1993 0.565 0.040 0.641 0.565 0.539 0.076 0.00003 0.026Honduras: Gómez- Sabaini (2003) 2000 0.539 0.079 0.420 0.539 0.506 - 0.119 - 0.00009 0.033Peru: Haughton (2004) 2000 0.470 0.056 0.455 0.471 0.445 - 0.015 - 0.00088 0.025Median - 0.089 - 0.00009 0.025

Country and study

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OutlineOutline




4.4. The PMPThe PMP



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3. Role of Key players in the tax 3. Role of Key players in the tax PMPPMP

ARGARG BRABRA CHLCHL COLCOL CRICRI GTMGTM MEXMEX PRYPRY VENVEN

ExecutiveExecutive HighHigh HighHigh HighHigh HighHigh MedMed.. MedMed Med.Med. MedMed HighHigh

CongressCongress LowLow Med.Med. HighHigh HighHigh HighHigh Med.Med. Med.Med. Med.Med. Med.Med.

JudiciaryJudiciary LowLow HighHigh HighHigh HighHigh Med.Med. HighHigh Med.Med. LowLow LowLow

Governors/Governors/MajorsMajors

HighHigh Med.Med. LowLow LowLow LowLow LowLow Med. Med. LowLow Med.Med.

BureaucracyBureaucracy LowLow HighHigh HighHigh LowLow HighHigh Low Low Med.Med. LowLow LowLow

BusinessBusiness Med.Med. Med.Med. Med.Med. HighHigh Med.Med. HighHigh Med.Med. HighHigh LowLow

PartiesParties Med. Med. Med.Med. HighHigh LowLow Med.Med. LowLow HighHigh Med.Med. LowLow

Ctry.Ctry.ActorActor

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Veto Player IndexVeto Player Index

Argentina (3)Argentina (3)

President (court aligned with executive)President (court aligned with executive)

Governors, especially the Buenos Aires mayorGovernors, especially the Buenos Aires mayor

In cahoots with legislators, which pass pork in return for favorsIn cahoots with legislators, which pass pork in return for favors

Brazil (4)Brazil (4)

ConstitutionConstitution

President has much powerPresident has much power

State bureaucracies, many with conflicting interests (unlike Argentina)State bureaucracies, many with conflicting interests (unlike Argentina)

Legislators also join forces with governorsLegislators also join forces with governors

Professional and powerful bureaucracyProfessional and powerful bureaucracy

Too many veto players has clearly led to gridlock: President Lula did some reform and left Too many veto players has clearly led to gridlock: President Lula did some reform and left the most controversial to be shelved.the most controversial to be shelved.

Chile (1,5)Chile (1,5)

President with a multi-party system which has the incentive to form consensus.President with a multi-party system which has the incentive to form consensus.

Electoral system encourages coalitions among political parties (about 5), fairly strong Electoral system encourages coalitions among political parties (about 5), fairly strong executive which originates executive which originates

Fairly strong executive with de facto control over the agenda and sole authority to initiate Fairly strong executive with de facto control over the agenda and sole authority to initiate legislation in taxationlegislation in taxation

President directly appoints regional and provincial governorsPresident directly appoints regional and provincial governors

Independent judiciary which interferes little in the budget process Independent judiciary which interferes little in the budget process

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Veto PlayersVeto Players

Colombia (3)Colombia (3)

Constitutional Court: examines all fiscal legislation (including tax), can veto most legislation as Constitutional Court: examines all fiscal legislation (including tax), can veto most legislation as a result of rigid 1991 constitution.a result of rigid 1991 constitution.

Presidential powers curbedPresidential powers curbed

Increasing power of legislative, Hare system gives incentives for fractionalizationIncreasing power of legislative, Hare system gives incentives for fractionalization

Not that there is too many veto players, but that the three have a tendency to limit each other, Not that there is too many veto players, but that the three have a tendency to limit each other, so it is almost impossible to get cooperative outcomes.so it is almost impossible to get cooperative outcomes.

Costa Rica (4)Costa Rica (4)

IV Chamber of constitutional courtIV Chamber of constitutional court

President in the first year in power, depending on the legislature (some evidence that it is able President in the first year in power, depending on the legislature (some evidence that it is able to pass more laws when its party is in the majority)to pass more laws when its party is in the majority)

Autonomous agencies of the public sector: removed from the give and take of partisan politics, Autonomous agencies of the public sector: removed from the give and take of partisan politics, have relative independence in budgets, as their budgets are not part of the Ordinary Budget..have relative independence in budgets, as their budgets are not part of the Ordinary Budget..

Supreme court interpretations exclude them from normal budgetary processes that require Supreme court interpretations exclude them from normal budgetary processes that require scrutiny from legislative and presidential veto. scrutiny from legislative and presidential veto.

Organized civil society groups, although much less so with the passage of time.Organized civil society groups, although much less so with the passage of time.

Guatemala (2,5)Guatemala (2,5)

Veto power dispersed according to constitution. In practice certain parties and factions allied Veto power dispersed according to constitution. In practice certain parties and factions allied with the military stil very powerful.are very powerful.with the military stil very powerful.are very powerful.

President, in conjunction with leading political party. Need 2/3 votes to pass legislationPresident, in conjunction with leading political party. Need 2/3 votes to pass legislation

Increasing participation from civil society and private sector, strong veto player in tax policies, Increasing participation from civil society and private sector, strong veto player in tax policies, although still undermined by human rights abuses and corruptionalthough still undermined by human rights abuses and corruption

Constitutionsl court: in practice not that active in tax policiesConstitutionsl court: in practice not that active in tax policies

23

Veto PlayersVeto Players

Mexico (2)Mexico (2)

Constitution makes president more of a guardian of status quo than initiator of change.Constitution makes president more of a guardian of status quo than initiator of change.

Bicameral, disciplined party system in Congress. Allowed to run for only one term, which limits Bicameral, disciplined party system in Congress. Allowed to run for only one term, which limits its ability to introduce legislationits ability to introduce legislation

Municipalities: have the possibility of imposing their own taxes, and do so to a small extent. Municipalities: have the possibility of imposing their own taxes, and do so to a small extent. Through partyThrough party

politics they can sometimes exert some influence over tax policy.politics they can sometimes exert some influence over tax policy.

Constitution makes president more of a guardian of status quo than initiator of change. Constitution makes president more of a guardian of status quo than initiator of change.

Top-level bureaucracy, legacy of the PRI, highly politically and economically powerful.Top-level bureaucracy, legacy of the PRI, highly politically and economically powerful.

Paraguay (2,5)Paraguay (2,5)

Although executive does not initiate bills, executive is still very powerful given historical legacyAlthough executive does not initiate bills, executive is still very powerful given historical legacy

Colorado party, if it has a majority (or whichever party can capture the median voter)Colorado party, if it has a majority (or whichever party can capture the median voter)

Senators generally politically powerful, and involved in business./agribusinessSenators generally politically powerful, and involved in business./agribusiness

Regional politics dominate Congressional discussions, particularly of deputiesRegional politics dominate Congressional discussions, particularly of deputies

Venezuela (2)Venezuela (2)

PresidentPresident

Congress (if Presidents‘ party has the majority)Congress (if Presidents‘ party has the majority)

Congress must negotiate wroth local interests.Congress must negotiate wroth local interests.

A gradual move in the '90s from stable consensus among ruling branches, to increasing power A gradual move in the '90s from stable consensus among ruling branches, to increasing power of small governments, finally to imposed Presidential power in 1999. of small governments, finally to imposed Presidential power in 1999.

Legislative used to be powerful, has gained on the side of what used to be introduced by party Legislative used to be powerful, has gained on the side of what used to be introduced by party elites, but not much..elites, but not much..

2400 0.50.5 11 1.51.5 22 2.52.5 33 3.53.5 44

ChileChile

MexicoMexico

VenezuelaVenezuela

GuatemalaGuatemala

ParaguayParaguay

ArgentinaArgentina

ColombiaColombia

BrazilBrazil

Costa RicaCosta Rica

Number of Effective Veto Players in the Tax Policy-Making Process, Number of Effective Veto Players in the Tax Policy-Making Process, Selected Latin American Countries, Latest DateSelected Latin American Countries, Latest Date

25

4. Tax Policy PMP4. Tax Policy PMP• ArgentinaArgentina: The executive initiates policies, but it requires the permission of most : The executive initiates policies, but it requires the permission of most

provincial governors, so that they instruct legislators to support the initiative. Their provincial governors, so that they instruct legislators to support the initiative. Their support is exchanged for political and fiscal favors.support is exchanged for political and fiscal favors.

• In In BraziBrazi, as Werneck (2004) puts it: “The tax reform debate [became] a noisy clash , as Werneck (2004) puts it: “The tax reform debate [became] a noisy clash of conflicting views, increasingly marked by a strong aversion towards revenue of conflicting views, increasingly marked by a strong aversion towards revenue losses. There [was] fear on all sides”. Although everyone agrees that the indirect losses. There [was] fear on all sides”. Although everyone agrees that the indirect tax system in Brazil needs to be reformed to remove cascading taxes, no tax system in Brazil needs to be reformed to remove cascading taxes, no agreement on how to get there was reached. The constitution of 1988 granted the agreement on how to get there was reached. The constitution of 1988 granted the states much a freer hand to introduce changes in their VATs.states much a freer hand to introduce changes in their VATs.

• There has been a deliberate, although insufficient, effort to raise revenues in order There has been a deliberate, although insufficient, effort to raise revenues in order to finance larger expenditures in to finance larger expenditures in ColombiaColombia..

• In In Costa RicaCosta Rica, one of the obstacles to introducing certain taxes has been the , one of the obstacles to introducing certain taxes has been the Constitutional Court (Sala Cuarta). For example, tax administration reform, Constitutional Court (Sala Cuarta). For example, tax administration reform, introduced in 1994, increased the ability for the administration to sanction tax introduced in 1994, increased the ability for the administration to sanction tax evaders, introduced the wealth tax, and allowed cross-checking of firms in the evaders, introduced the wealth tax, and allowed cross-checking of firms in the direct taxes chain. Most of the main provisions of this reform were declared direct taxes chain. Most of the main provisions of this reform were declared unconstitutional. unconstitutional.

• President Portillo’s landslide victory in 1999 combined with an FRG majority in President Portillo’s landslide victory in 1999 combined with an FRG majority in Congress suggested possibilities for rapid legislative action. However, under the Congress suggested possibilities for rapid legislative action. However, under the GuatemalanGuatemalan constitution of 1985, passage of many kinds of legislation requires a constitution of 1985, passage of many kinds of legislation requires a two-thirds vote. Passage of such legislation was not possible, therefore, with FRG two-thirds vote. Passage of such legislation was not possible, therefore, with FRG votes alone.votes alone.

26

5. Outer features5. Outer features

Outer Features

- Few temporary taxes- Few tax amnesties- Few changes in basic structure; - Gradual changes in tax rates- Few reversals of policies legislated in the last 5 years

- Not a lot of earmarking

Coordination/coherence - Simple tax system

- Few tax rates

- No loopholes

- Few exemptions

- People's attitude towards paying taxes- Credibility of the tax system- Strong and well- financed tax administration- Low evasion

Public regardedness - Horizontal and vertical equity

- Few exemptions

Definition

I nvestment-related qualities

Stability

- Few constitutional mandates (or turnovers from supreme court?)- Abiolity of executive to make some adjustments depending on fiscal situation

Adaptability/flexibility

Tax policies’ Outer Features DefinitionsTax policies’ Outer Features Definitions

27

Poor investment related Poor investment related qualitiesqualities

Outer Features ARG BRA CHL COL CRI GTM MEX PRY VEN AVG.

Stability 2,0 3,0 4,0 3,0 4,0 2,5 3,5 3,0 1,0 2,9Adaptability/ flexibility 2,0 2,0 4,0 1,0 1,0 1,0 3,0 3,0 2,0 2,1Coordination/ coherence 3,0 1,0 4,0 2,0 3,0 1,0 3,0 2,0 2,0 2,3Investment-related qualities 1,0 3,0 4,0 1,0 2,0 2,0 1,0 1,0 1,0 1,8Public regardedness 1,0 2,0 4,0 3,0 3,5 3,0 2,0 1,0 2,0 2,4

Total 9,0 11,0 20,0 10,0 13,5 9,5 12,5 10,0 8,0 11,5

Score

Tax Policies’ Outer Features RankingsTax Policies’ Outer Features Rankings1= Minimum ; 4 = Maximum1= Minimum ; 4 = Maximum

28

Mediocre features, except Mediocre features, except for Chilefor Chile

00

22

44

66

88

1010

1212

1414

1616

1818

2020

VenezuelaVenezuela ArgentinaArgentina GuatemalaGuatemala ColombiaColombia ParaguayParaguay BrazilBrazil Costa RicaCosta Rica MexicoMexico ChileChile

Value of Outer FeaturesValue of Outer Features

29

Simple correlationsSimple correlations

Costa Rica

Colombia

Guatemala

Brazil

Argentina

Venezuela

Paraguay

Chile

Mexico

5%

10%

15%

20%

25%

7 9 11 13 15 17 19 21Quality of Outer Features Index

Str

uc

tura

l T

ax R

even

ue

(Ave

rag

e 1

985

-20

02) Correlation = 0,56

Costa Rica

ColombiaGuatemala

Brazil

Argentina

Venezuela

Paraguay

Chile

Mexico

10%

15%

20%

25%

30%

35%

40%

45%

50%

55%

60%

65%

7 9 11 13 15 17 19 21Quality of Outer Features Index

VA

T P

rod

uc

tiv

ity

(A

ver

age

198

5 -

2001

)

Correlation = 0,74

Costa Rica

Colombia

Guatemala

Brazil

Argentina

Venezuela

Paraguay

Chile

Mexico

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

7 9 11 13 15 17 19 21

Quality of Outer Features Index

Bu

sin

ess

Tax

Rat

e T

ota

l Ch

ang

e (1

985

-20

01)

Correlation = 0,60

Costa RicaColombia

Guatemala

Brazil

Argentina

Venezuela

Paraguay

Chile

Mexico

10%

15%

20%

25%

30%

35%

40%

45%

7 9 11 13 15 17 19 21

Quality of Outer Features Index

Bu

sin

ess

Tax

Rat

e T

ota

l Ave

rag

e (

1985

-20

01)

Correlation = -0,80

30

6. Empirical evidence6. Empirical evidence

Tax policies’ Outer Features ProxiesTax policies’ Outer Features Proxies

Outer Features

Stability

Adaptability/ flexibility

Coordination/ coherence Lora's Index of Tax Neutrality

Investment- related qualities

Public regardedness

Proxies

Mohan's Index of Tax Reform

Income and VAT Productivities

31

Measuring reform activityMeasuring reform activity

GrossGross NetNet(a) Tax system overhaul (0.2)(a) Tax system overhaul (0.2) 1111 1111(b) VAT creation (0.2)(b) VAT creation (0.2) 11 11(c) VAT base broadening (0.1)(c) VAT base broadening (0.1) 1717 1515(d) VAT rate increase (0.1)(d) VAT rate increase (0.1) 2929 2121(e) Elimination of minor duties (0.1)(e) Elimination of minor duties (0.1) 55 55(f) Personal income tax base change (0.1)(f) Personal income tax base change (0.1) 1414 1414(g) Personal income tax rate change/reduction (0.1)(g) Personal income tax rate change/reduction (0.1) 1616 88(h) Corporate income tax base change (0.1)(h) Corporate income tax base change (0.1) 99 77(i) Corporate income tax rate change/reduction (0.1)(i) Corporate income tax rate change/reduction (0.1) 2323 55(j) Comprehensive administrative reform (0.1)(j) Comprehensive administrative reform (0.1) 55 55(k) Creation of other taxes (excises, bank debits, (k) Creation of other taxes (excises, bank debits, gross assets) (0.1)gross assets) (0.1) 99 99Average of reform items by countryAverage of reform items by country 7.77.7 5.65.6Average of reform years by countryAverage of reform years by country 4.24.2

Main Types of Reform 1990-2002 (Absolute number of reforms in 17 Main Types of Reform 1990-2002 (Absolute number of reforms in 17 countries)countries)

Source: Own calculations as explained in text based on IMF Article IV Reports and Source: Own calculations as explained in text based on IMF Article IV Reports and questionnaires applied to Tax Administration officials in some of the countries.questionnaires applied to Tax Administration officials in some of the countries.

32

Have reforms paid off?Have reforms paid off?

CountryCountry

Amount of Amount of legislative legislative activity, activity,

1990-20021990-2002

Number of Number of years with years with legislative legislative activity, activity,

1990-20021990-2002

Change in tax Change in tax revenues 1990-revenues 1990-2002, % GDP2002, % GDP

Change in Change in neutrality neutrality

index, 1990-index, 1990-20022002

ArgentinaArgentina 2.12.1 77 0.0%0.0% -0.05-0.05BoliviaBolivia 0.30.3 33 4.9%4.9% -0.10-0.10BrazilBrazil 00 00 5.6%5.6% 0.060.06ChileChile 0.40.4 44 0.4%0.4% 0.070.07ColombiaColombia 0.60.6 66 1.7%1.7% -0.05-0.05Costa RicaCosta Rica 0.30.3 44 -6.8%-6.8% 0.020.02Dominican RepublicDominican Republic 0.50.5 22 5.1%5.1% 0.330.33EcuadorEcuador 0.70.7 66 1.0%1.0% 0.060.06El SalvadorEl Salvador 0.30.3 44 1.8%1.8% 0.250.25GuatemalaGuatemala 0.90.9 55 3.8%3.8% 0.060.06HondurasHonduras 0.70.7 66 1.3%1.3% 0.070.07MexicoMexico 0.10.1 66 -0.7%-0.7% -0.01-0.01NicaraguaNicaragua 0.80.8 55 12.5%12.5% 0.280.28PanamaPanama 0.20.2 22PeruPeru 0.90.9 44 0.4%0.4% 0.190.19ParaguayParaguay 0.40.4 11 0.0%0.0% 0.280.28UruguayUruguay 0.40.4 55 1.1%1.1% 0.080.08VenezuelaVenezuela 0.80.8 55 -7.7%-7.7% 0.100.10AveragesAverages 0.580.58 4.174.17 1.4%1.4% 0.100.10Correlation with amount of legislative activityCorrelation with amount of legislative activity 1.001.00 0.580.58 -0.04-0.04 -0.11-0.11Correlation with number of years with legislative Correlation with number of years with legislative activityactivity 0.580.58 1.001.00 -0.20-0.20 -0.41-0.41

Indicators of Tax Reforms and OutcomesIndicators of Tax Reforms and Outcomes

33

Data Definition: Dependent Data Definition: Dependent variablesvariables

VariableVariable DefinitionDefinition SourceSource

Mahon's Tax Reform Mahon's Tax Reform IndexIndex

A measure of the extent of tax reform passed by Congress A measure of the extent of tax reform passed by Congress made up with the following components: tax system made up with the following components: tax system overhaul (0.2), VAT creation (0,2), VAT expansion (0.1), overhaul (0.2), VAT creation (0,2), VAT expansion (0.1), VAT rate increase (0.1), corporate income tax rate VAT rate increase (0.1), corporate income tax rate increase (0.1), broadening corporate income tax base increase (0.1), broadening corporate income tax base (0.1), comprehensive administrative reform (0.1), new (0.1), comprehensive administrative reform (0.1), new taxes (excises, bank debits, gross assets) (01.)taxes (excises, bank debits, gross assets) (01.)

Own calculationsOwn calculations

Tax Reform DummyTax Reform Dummy Takes the value of 1 for the year where any of the above Takes the value of 1 for the year where any of the above has taken place.has taken place.

Own calculationsOwn calculations

IMFcond1IMFcond1 Dummy for the year when programs with IMF starts.Dummy for the year when programs with IMF starts. Own calculationsOwn calculations

IMFdisbIMFdisb Dummy for the year when IMF disburses money.Dummy for the year when IMF disburses money. Own calculationsOwn calculations

Tax Neutrality IndexTax Neutrality Index Combines tax rates and their productivities. Lower tax Combines tax rates and their productivities. Lower tax

rates and higher productivities imply higher index rates and higher productivities imply higher index values.values.

GFS and Article IV.IMFGFS and Article IV.IMF

VAT Productivity IndexVAT Productivity Index (VAT revenues/(GDP – X + M))/ VAT basic tax rate(VAT revenues/(GDP – X + M))/ VAT basic tax rate GFS and Article IV.IMFGFS and Article IV.IMF

Income Tax Productivity Income Tax Productivity IndexIndex

(Income tax revenues/GDP)/(½*Corporate income tax rate + (Income tax revenues/GDP)/(½*Corporate income tax rate + ½*Maximum personal income tax rate)½*Maximum personal income tax rate) GFS and Article IV.IMFGFS and Article IV.IMF

VAT Tax RateVAT Tax Rate Tax applied to most items included in baseTax applied to most items included in base Price Waterhouse Price Waterhouse CoopersCoopers

Personal Income Tax RatePersonal Income Tax Rate Maximum tax rateMaximum tax rate Price Waterhouse Price Waterhouse CoopersCoopers

Corporate Tax RateCorporate Tax Rate Basic tax rate applied to corporationsBasic tax rate applied to corporations Price Waterhouse Price Waterhouse CoopersCoopers

Personal Exemption Level Personal Exemption Level Non-taxed personal income level as % of GDP per capitaNon-taxed personal income level as % of GDP per capita Taken from Stotsky et Taken from Stotsky et al 2002al 2002

Tax RevenuesTax Revenues Tax revenues as percent of GDP.Tax revenues as percent of GDP. GFS and article IV.IMFGFS and article IV.IMF

34

Data Definition: Macro Data Definition: Macro variablesvariables


Adjusted Fiscal BalanceAdjusted Fiscal Balance It is the fiscal balance of the central government adjusted by It is the fiscal balance of the central government adjusted by the endogenous influence of the economic cycle. the endogenous influence of the economic cycle. Own calculations Own calculations

Purchasing Power LossPurchasing Power Loss Calculated from CPI.Calculated from CPI. Taken from Lora and Taken from Lora and Olivera (2004). Olivera (2004).

Cycle (Log GDP) Cycle (Log GDP) From Stata's H-P filterFrom Stata's H-P filter Own CalculationsOwn Calculations

CrisisCrisis Deviation of the GDP from its trend (in logs) when GDP is Deviation of the GDP from its trend (in logs) when GDP is below its trend and 0 otherwise. below its trend and 0 otherwise. Own CalculationsOwn Calculations

35

Data Definition: Political Data Definition: Political variablesvariables


Votes IncumbentVotes Incumbent Percentage of votes that elected the incumbent that is finishing Percentage of votes that elected the incumbent that is finishing term in the year indicated.term in the year indicated.

Taken from Lora and Taken from Lora and Olivera (2004).Olivera (2004).

Votes Outgoing IncumbentVotes Outgoing Incumbent Percentage of votes for the party of the president that is finishing Percentage of votes for the party of the president that is finishing term in the year indicated.term in the year indicated.


Legislative Votes outgoing Legislative Votes outgoing IncumbentIncumbent Percentage of votes of the incumbent majority party.Percentage of votes of the incumbent majority party. Taken from Lora and Taken from Lora and

Olivera (2004).Olivera (2004).

Administration Cycle YearAdministration Cycle Year Period trend. Note that the period begins next year after the Period trend. Note that the period begins next year after the elections (this for fiscal budgetary purposes).elections (this for fiscal budgetary purposes).


IdeologyIdeology It classifies parties on a left to right scale according to their It classifies parties on a left to right scale according to their economic ideology.economic ideology.

Taken from DPI (2002) Taken from DPI (2002) and Coppedge (1994 and Coppedge (1994 and 2001). and 2001).

CoalitionCoalitionEquals 1 if it is a coalition government, where coalition means that Equals 1 if it is a coalition government, where coalition means that opposition parties also hold positions in the executive, such as opposition parties also hold positions in the executive, such as cabinet positions. cabinet positions.

Taken from Cheibub Taken from Cheibub et.al. (2003). et.al. (2003).

Effective Number of PartiesEffective Number of PartiesIt is the effective number of parties of that year's presidential It is the effective number of parties of that year's presidential election calculated using the electoral results from Payne et.al. election calculated using the electoral results from Payne et.al. (2002).(2002).

Taken from Lora and Taken from Lora and Olivera (2004). Olivera (2004).

Polarization IndexPolarization Index It calculates the effective ideological distance between the It calculates the effective ideological distance between the different parties.different parties.


PromisesPromises The promises variable takes values on a scale 0-1, where higher The promises variable takes values on a scale 0-1, where higher values mean more efficiency-oriented campaign messages. values mean more efficiency-oriented campaign messages.

Taken from Lora and Taken from Lora and Olivera (2004). Olivera (2004).

36

Data Definition: Political variables Data Definition: Political variables (cont.)(cont.)


Democracy IndexDemocracy Index The Democracy indicator is an additive eleven-point scale (0-10).The Democracy indicator is an additive eleven-point scale (0-10). Polity IV DatabasePolity IV Database

Polity IndexPolity Index

Combined Polity Score: The Polity score is computed by Combined Polity Score: The Polity score is computed by subtracting the Autocracy Index score from the Democracy Index subtracting the Autocracy Index score from the Democracy Index score; the resulting unified polity scale ranges from +10 (strongly score; the resulting unified polity scale ranges from +10 (strongly democratic) to -10 (strongly autocratic).democratic) to -10 (strongly autocratic).

Polity IV DatabasePolity IV Database

Executive Constrains IndexExecutive Constrains Index

This variable refers to the extent of institutionalized constraints on This variable refers to the extent of institutionalized constraints on the decision making powers of chief executives, individual or the decision making powers of chief executives, individual or collective. Such limitations may be imposed by any collective. Such limitations may be imposed by any "accountability groups.""accountability groups."


Openness of Executive Openness of Executive Recruitment IndexRecruitment Index

Openness of Executive Recruitment: Recruitment of the chief Openness of Executive Recruitment: Recruitment of the chief executive is "open" to the extent that all the politically active executive is "open" to the extent that all the politically active population has an opportunity, in principle, to attain the position population has an opportunity, in principle, to attain the position through a regularized process.through a regularized process.


Taxes well spentTaxes well spent Are taxes well spent? - %no.Are taxes well spent? - %no. Latinbarómetro 2003Latinbarómetro 2003

Taxes too highTaxes too high Are taxes too high? % Yes.Are taxes too high? % Yes. Latinbarómetro 2003Latinbarómetro 2003

Extent and Effect of the Tax Extent and Effect of the Tax SystemSystem

The level of taxes in your country (=1 significantly limits The level of taxes in your country (=1 significantly limits incentives to work or invest, 7= has little impact on incentives to incentives to work or invest, 7= has little impact on incentives to work or invest)work or invest)

Global Competitiveness Global Competitiveness Report 2004-2005Report 2004-2005

Efficiency of the tax systemEfficiency of the tax system Your country's tax system is (1=highly complex, 7=simple and Your country's tax system is (1=highly complex, 7=simple and transparent)transparent)

Global Competitiveness Global Competitiveness Report 2004-2005Report 2004-2005

37

Explicative variablesExplicative variables 11 22 33 44 55 66 77 88 99 1010

0,2590,259 0,3030,303 0,1240,124 0,5420,542 0,8830,883 0,860,86 0,6020,602 0,1290,129 0,2630,263 0,3040,304(0,87)(0,87) (1,00)(1,00) (0,45)(0,45) (1,20)(1,20) (1,52)(1,52) (1,43)(1,43) (1,19)(1,19) (0,41)(0,41) (0,87)(0,87) (0,99)(0,99)

0,172**0,172** 0,163**0,163** 0,390***0,390*** 0,213**0,213** 0,233***0,233*** 0,277***0,277*** 0,172**0,172** 0,203***0,203*** 0,193***0,193*** 0,184***0,184***(2,44)(2,44) (2,40)(2,40) (2,68)(2,68) (2,52)(2,52) (2,87)(2,87) (2,95)(2,95) (2,58)(2,58) (2,65)(2,65) (2,65)(2,65) (2,61)(2,61)-0,044-0,044 -0,055-0,055 -0,071-0,071 -0,116-0,116 -0,378-0,378 -0,0418-0,0418 -0,236-0,236 -0,039-0,039 -0,043-0,043 -0,054-0,054(-0,36)(-0,36) (-0,45)(-0,45) (-0,59)(-0,59) (-0,66)(-0,66) (-1,32)(-1,32) (-0,11)(-0,11) (-1,06)(-1,06) (-0,33)(-0,33) (-0,36)(-0,36) (-0,46)(-0,46)0,048**0,048** 0,122**0,122** 0,0448**0,0448** 0,0392*0,0392* -0,003-0,003 0,00190,0019 -0,002-0,002 0,0488**0,0488** 0,0488**0,0488** 0,119**0,119**(2,42)(2,42) (2,58)(2,58) (2,30)(2,30) (1,69)(1,69) (-0,12)(-0,12) (0,07)(0,07) (-0,09)(-0,09) (2,41)(2,41) (2,42)(2,42) (2,48)(2,48)

-0,014***-0,014*** -0,008*-0,008* 0,0030,003 -0,0166***-0,0166*** -0,0145**-0,0145** -0,0136*-0,0136* -0,017***-0,017*** -0,0142***-0,0142*** -0,0136***-0,0136*** -0,0079*-0,0079*(-3,09)(-3,09) (-1,71)(-1,71) (0,42)(0,42) (-3,02)(-3,02) (-2,39)(-2,39) (-1,77)(-1,77) (-2,97)(-2,97) (-3,12)(-3,12) (-2,98)(-2,98) (-1,65)(-1,65)

-0,032**-0,032** -0,0309-0,0309(-2,28)(-2,28) (-2,14)(-2,14)

-0,012**-0,012**(-2,37)(-2,37)

0,01220,0122 0,0170,017(0,57)(0,57) (0,73)(0,73)

-0,0394*-0,0394* 0,0110,011 0,00330,0033(-1,88)(-1,88) (0,28)(0,28) (0,08)(0,08)

-0,167-0,167 -0,0155-0,0155(-1,17)(-1,17) (-0,93)(-0,93)0,00760,0076 -0,238-0,238(0,05)(0,05) (-0,96)(-0,96)

-0,0766-0,0766 -0,0965*-0,0965* -0,0818-0,0818(-1,26)(-1,26) (-1,81)(-1,81) (-1,28)(-1,28)

-0,392-0,392(-1,66)(-1,66)-0,297-0,297(-0,73)(-0,73)

0,00190,0019(0,07)(0,07)0,01290,0129(0,81)(0,81)

-0,0462*-0,0462* -0,0196*-0,0196* -0,0191*-0,0191*(-1,72)(-1,72) (-1,80)(-1,80) (-1,78)(-1,78)0,0308*0,0308* 0,0191*0,0191* 0,0187*0,0187*(1,92)(1,92) (1,76)(1,76) (1,75)(1,75)

0,0413**0,0413** 0,0270,027 -0,012-0,012 0,056**0,056** 0,1010,101 0,47*0,47* 0,105**0,105** 0,0731*0,0731* 0,0736***0,0736*** 0,0584***0,0584***(2,08)(2,08) (1,24)(1,24) (-0,36)(-0,36) (2,45)(2,45) (0,90)(0,90) (1,97)(1,97) (2,45)(2,45) (1,69)(1,69) (2,77)(2,77) (2,07)(2,07)

Adjusted R-squareAdjusted R-square 0,12380,1238 0,14390,1439 0,16960,1696 0,16900,1690 0,17680,1768 0,18030,1803 0,17880,1788 0,14160,1416 0,13910,1391 0,15460,1546Number of ObsevationsNumber of Obsevations 235235 235235 235235 181181 108108 9494 117117 235235 235235 235235

*** Significant at 1 percent ** Significant at 5 percent * Significant at 10 percent t-statistic in parenthesis

Mahon's Tax Reform Index (Taxref)Mahon's Tax Reform Index (Taxref)

ConstantConstant

Effective Number of PartiesEffective Number of Parties

Votes IncumbentVotes Incumbent

Democracy IndexDemocracy Index


Openess of Executive Recruitment IndexOpeness of Executive Recruitment Index

Legislative Votes outgoing IncumbentLegislative Votes outgoing Incumbent

Polarization IndexPolarization Index


Adjusted Fiscal BalanceAdjusted Fiscal Balance

Purchase Power LossPurchase Power Loss

Cycle (Log GDP)Cycle (Log GDP)

Administration Cycle YearAdministration Cycle Year

PromisesPromises

IMFcondIMFcond

CoalitionCoalition

IdeologyIdeology

Administration Cycle Year*IMFcond1Administration Cycle Year*IMFcond1

Purchase Power Loss*IMFcond1Purchase Power Loss*IMFcond1

Determinants of stability/adaptabilityDeterminants of stability/adaptability

38

Explicative variablesExplicative variables 11 22 33 44 55 66 77 88 99

1,9921,992 4,2854,285 4,444,44 2,6032,603 2,4712,471 2,2912,291 5,5355,535 12,56612,566 5,8175,817(0,59)(0,59) (1,17)(1,17) (1,21)(1,21) (0,69)(0,69) (0,55)(0,55) (0,52)(0,52) (1,21)(1,21) (1,49)(1,49) (1,24)(1,24)

0,997**0,997** 0,866*0,866* 0,864*0,864* 0,2440,244 0,6270,627 0,6980,698 1,334**1,334** 4,367***4,367*** 1,461**1,461**(2,19)(2,19) (1,80)(1,80) (1,80)(1,80) (0,40)(0,40) (0,90)(0,90) (1,14)(1,14) (2,25)(2,25) (3,03)(3,03) (2,38)(2,38)-0,130-0,130 0,1970,197 0,1460,146 1,0121,012 -5,469-5,469 0,3720,372 -0,832-0,832 7,2587,258 -0,720-0,720(-0,09)(-0,09) (0,10)(0,10) (0,08)(0,08) (0,50)(0,50) (-1,08)(-1,08) (0,15)(0,15) (-0,38)(-0,38) (1,35)(1,35) (-0,31)(-0,31)

8,5928,592(1,08)(1,08)-1,82-1,82

(-0,44)(-0,44)-9,067*-9,067* -3,364-3,364(-1,79)(-1,79) (-0,79)(-0,79)

0,417*0,417* 0,2280,228 0,4820,482 -0,188-0,188 0,769**0,769** 0,566*0,566* 0,3100,310 0,0240,024 0,3010,301(1,90)(1,90) (0,94)(0,94) (1,02)(1,02) (-0,55)(-0,55) (2,18)(2,18) (1,78)(1,78) (1,18)(1,18) (0,06)(0,06) (1,14)(1,14)

0,606***0,606*** 0,609***0,609*** 0,566***0,566*** 0,553**0,553** 0,431*0,431* 0,513**0,513** 0,747*0,747* 0,531**0,531**(2,97)(2,97) (2,98)(2,98) (2,73)(2,73) (2,07)(2,07) (1,75)(1,75) (2,25)(2,25) (1,82)(1,82) (2,29)(2,29)

-0,199***-0,199*** -0,185**-0,185** -0,163**-0,163** -0,187***-0,187*** -0,155*-0,155* -0,178**-0,178** -0,213***-0,213*** -0,311**-0,311** -0,210***-0,210***(-2,95)(-2,95) (-2,60)(-2,60) (-2,06)(-2,06) (-2,59)(-2,59) (-1,71)(-1,71) (-2,05)(-2,05) (-2,73)(-2,73) (-2,20)(-2,20) (-2,60)(-2,60)

-0,114-0,114(-0,63)(-0,63)

1,817*1,817*(1,74)(1,74)

-0,062-0,062(-0,08)(-0,08)

-0,019-0,019 -0,565*-0,565* 0,0470,047(0,26)(0,26) (-1,87)(-1,87) (0,61,)(0,61,)-0,676-0,676 3,836**3,836** -0,715-0,715(-1,24)(-1,24) (2,18)(2,18) (-1,28)(-1,28)

-0,390-0,390(-0,40)(-0,40)-2,295-2,295(-0,79)(-0,79)0,2090,209(0,07)(0,07)0,9410,941(0,60)(0,60)0,2090,209 0,3060,306(0,07)(0,07) (0,96)(0,96)0,9410,941 -0,0238-0,0238(0,60)(0,60) (-0,10)(-0,10)

-0,543**-0,543**(-2,47)(-2,47)0,31960,3196(1,61)(1,61)

-0,311-0,311 -0,475*-0,475* -0,535**-0,535** -0,342-0,342 0,2920,292 -0,267-0,267 -0,345-0,345 0,3060,306 --(-1,33)(-1,33) (-1,89)(-1,89) (-1,99)(-1,99) (-1,28)(-1,28) (0,49)(0,49) (-0,70)(-0,70) (-0.85)(-0.85) (0,14)(0,14) --

Adjusted R-squareAdjusted R-square 0,00090,0009 0,00020,0002 0,00040,0004 0,00020,0002 0,00800,0080 0,00650,0065 0,00110,0011 0,6840,684 0,00190,0019Number of ObsevationsNumber of Obsevations 235235 219219 219219 219219 138138 153153 190190 9595 190190

*** Significant at 1 percent ** Significant at 5 percent * Significant at 10 percent t-statistic in parenthesis


Tax Reform Dummy (=1 if Taxref different than 0)Tax Reform Dummy (=1 if Taxref different than 0)

CrisisCrisis

Social_expenditureSocial_expenditure

Administration Cycle Year*IMFcond1Administration Cycle Year*IMFcond1

Purchase Power Loss*IMFcond1Purchase Power Loss*IMFcond1

ConstantConstant





Openess of Executive Recruitment IndexOpeness of Executive Recruitment Index


Votes Outgoing IncumbentVotes Outgoing Incumbent


PromisesPromises

Legislative Votes Outgoing IncumbentLegislative Votes Outgoing Incumbent



Administration Cycle YearAdministration Cycle Year

IMFcondIMFcond

IMFdisbIMFdisb

UnemploymentUnemployment

CoalitionCoalition

Determinants of stability/adaptabilityDeterminants of stability/adaptability

39


Outer Features

Stability


Coordination/coherence Lora's Index of Tax Neutrality

Investment-related qualities

Public regardedness

Proxies



40

Neutrality’s mixed evidenceNeutrality’s mixed evidence

Country 1985-89 1990-94 1995-99 2000-021985-89 Vs

2000-02

Argentina 29.1% 37.4% 35.8% 33.7% 4.6%Bolivia 55.8% 66.3% 56.1% 54.0% - 1.8%Brazil 22.8% 35.0% 38.9% 40.9% 18.1%Chile 49.6% 49.3% 50.9% 52.6% 3.0%Colombia 47.8% 50.1% 42.7% 44.5% - 3.4%Costa Rica 42.9% 51.3% 50.1% 51.3% 8.4%Ecuadro 39.1% 51.5% 51.3% 56.5% 17.4%El Salvador 25.9% 42.1% 52.5% 54.2% 28.2%Guatemala 42.7% 50.6% 53.4% 52.2% 9.6%Honduras 42.5% 47.0% 54.0% 56.7% 14.1%J amaica 38.8% 62.8% 66.5% 67.7% 28.9%Mexico 33.8% 45.7% 41.8% 41.3% 7.5%Nicaragua . 35.9% 42.7% 49.6% …Paraguay 32.8% 47.6% 62.8% 60.9% 28.1%Peru 36.5% 35.2% 45.8% 52.8% 16.3%Dominican Republic 27.5% 45.7% 55.7% 60.9% 33.4%Trinidad and Tobago 32.0% 52.1% 52.8% 48.0% 16.0%Uruguay 52.2% 48.7% 56.8% 55.6% 3.4%Venezuela 30.2% 41.9% 49.1% 45.3% 15.1%

Neutrality Tax Index

Source: Own calculations based on I MF. Data from Government Finance Statistics and Article I V. Several Years

41

Neutrality: interrupted Neutrality: interrupted progressprogress

Neutrality Tax Index (Avg.)Neutrality Tax Index (Avg.)

28%28%

33%33%

38%38%

43%43%

48%48%

53%53%

19851985 19861986 19871987 19881988 19891989 19901990 19911991 19921992 19931993 19941994 19951995 19961996 19971997 19981998 19991999 20002000 20012001 20022002

(*) Includes Argentina, Brazil, Chile, Colombia, Costa Rica, Ecuador, El Salvador, Guatemala, Honduras, Jamaica, Mexico, Nicaragua, Paraguay, Peru, República Dominicana, (*) Includes Argentina, Brazil, Chile, Colombia, Costa Rica, Ecuador, El Salvador, Guatemala, Honduras, Jamaica, Mexico, Nicaragua, Paraguay, Peru, República Dominicana, Trinidad and Tobago, Uruguay and Venezuela. Trinidad and Tobago, Uruguay and Venezuela.

Source: IMF. Data from Government Finance Statistics and Article IV. Several Years. PriceWaterHouseCoopers: Individual Taxes and Corporation Taxes. Worldwide Source: IMF. Data from Government Finance Statistics and Article IV. Several Years. PriceWaterHouseCoopers: Individual Taxes and Corporation Taxes. Worldwide Summaries. Several yearsSummaries. Several years

NTI= Average (Inc. Prod. Index + VATP + Corp. Tax Rate Index + Per. Tax Rate Index + VAT Tax Rate Index)

42

Tax Neutrality IndexTax Neutrality Index

Explicative variablesExplicative variables 11

0,652**0,652**(2,13)(2,13)

-0,070**-0,070**(-2,15)(-2,15)-0,116-0,116(-0,89)(-0,89)0,0030,003(0,32)(0,32)

-0,0124-0,0124(-0,92)(-0,92)

-0,078***-0,078***(-3,19)(-3,19)

0,244***0,244***(3,45)(3,45)

0,108***0,108***(3,01)(3,01)

-0,097***-0,097***(-3,75)(-3,75)

0,0546***0,0546***(3,57)(3,57)

0,730***0,730***(9,45)(9,45)

Adjusted R-squareAdjusted R-square 0,70210,7021Number of ObsevationsNumber of Obsevations 117117

*** Significant at 1 percent*** Significant at 1 percent** Significant at 5 percent** Significant at 5 percent* Significant at 10 percent* Significant at 10 percentt-statistic in parenthesist-statistic in parenthesis




IMFcondIMFcond



ConstantConstant

IMFdisbIMFdisb

CoalitionCoalition


PromisesPromises

Determinants of Determinants of coordination/coherencecoordination/coherence

43


Outer Features

Stability


Coordination/coherence Lora's Index of Tax Neutrality

Investment-related qualities

Public regardedness

Proxies



44

Income taxes: productivity on the Income taxes: productivity on the riseriseLAC's Income Tax Productivity (Avg.)LAC's Income Tax Productivity (Avg.)

8%8%

9%9%

10%10%

11%11%

12%12%

13%13%

14%14%

15%15%

16%16%

19851985 19861986 19871987 19881988 19891989 19901990 19911991 19921992 19931993 19941994 19951995 19961996 19971997 19981998 19991999 20002000 20012001 20022002


Source: IMF. Data from Government Finance Statistics and Article IV. Several Years. PriceWaterHouseCoopers: Individual Taxes and Corporation Taxes. Worldwide Summaries. Several years

ITP =ITP =Income Tax Revenue / GDPIncome Tax Revenue / GDP

(Per. Inc. Tax Rate + Corp. Inc. Tax Rate) / 2(Per. Inc. Tax Rate + Corp. Inc. Tax Rate) / 2

45

VAT: important productivity gainsVAT: important productivity gains

LAC's VAT Productivity (Avg.)*LAC's VAT Productivity (Avg.)*

20%20%

22%22%

24%24%

26%26%

28%28%

30%30%

32%32%

34%34%

36%36%

38%38%

19851985 19861986 19871987 19881988 19891989 19901990 19911991 19921992 19931993 19941994 19951995 19961996 19971997 19981998 19991999 20002000 20012001 20022002

(*) Includes Argentina, Brazil, Chile, Colombia, Costa Rica, Ecuador, El Salvador, Guatemala, Honduras, Jamaica, Mexico, Nicaragua, Paraguay, Peru, República Dominicana, (*) Includes Argentina, Brazil, Chile, Colombia, Costa Rica, Ecuador, El Salvador, Guatemala, Honduras, Jamaica, Mexico, Nicaragua, Paraguay, Peru, República Dominicana, Trinidad y Tobago, Uruguay y Venezuela. Trinidad y Tobago, Uruguay y Venezuela.

Source: IMF. Data from Government Finance Statistics and Article IV. Several Years. PriceWaterHouseCoopers: Individual Taxes and Corporation Taxes. Worldwide Source: IMF. Data from Government Finance Statistics and Article IV. Several Years. PriceWaterHouseCoopers: Individual Taxes and Corporation Taxes. Worldwide Summaries. Several yearsSummaries. Several years

VATP =VATP =VAT Revenue / (GDP+M-X)VAT Revenue / (GDP+M-X)

(VAT Rate)(VAT Rate)

46

Income Tax ProductivityIncome Tax Productivity

Explicative variablesExplicative variables (1)(1)

1,362***1,362***(3,98)(3,98)

-0,167***-0,167***(-3,87)(-3,87)-0,272-0,272(-1,38)(-1,38)

-0,038***-0,038***(-2,98)(-2,98)0,103*0,103*(1,73)(1,73)-0,131-0,131(-1,13)(-1,13)

-0,002***-0,002***(-5,24)(-5,24)

0,465***0,465***(6,02)(6,02)

Adjusted R-squareAdjusted R-square 0,75360,7536Number of ObsevationsNumber of Obsevations 175175

*** Significant at 1 percent*** Significant at 1 percent** Significant at 5 percent** Significant at 5 percent* Significant at 10 percent* Significant at 10 percentt-statistic in parenthesist-statistic in parenthesis




ConstantConstant





Determinants of investment-related Determinants of investment-related qualities and public regardednessqualities and public regardedness

47

Explicative variables 1 2 3

0,494 0,484 0,074(0,88) (0,84) (0,15)

-0,240*** -0,246*** -0,179*(-3,08) (-3,16) (-1,88)0,320 0,324 0,062**(1,48) (1,47) (2,41)

0,061** 0,055** 0,047*(2,56) (2,34) (1,84)

0,019(0,79)0,000(0,09)

0,032** 0,033** 0,031**(2,58) (2,62) (2,60)

0,050*** 0,051*** 0,038**(2,79) (2,81) (2,26)

-0,660***(-3,25)

-0,018** -0,017* -0,012(-2,13) (-1,92) (-1,23)0,060** 0,0598** -0,048*(2,53) (2,47) (1,67)-0,043 -0,06 0,275*(-0,33) (-0,46) (1,97)

Adjusted R-square 0,7120 0,7133 0,820Number of Obsevations 165 165 148

*** Significant at 1 percent** Significant at 5 percent* Significant at 10 percent

Constant

Effective Number of Parties

Votes Incumbent

Polity Index

Executive Constrains Index

IMFcond1

IMFdisb

Administration Cycle Year

Ideology

Adjusted Fiscal Balance

Purchase Power Loss

VAT Productivity Index

Cycle (Log GDP)

Determinants of investment-related Determinants of investment-related qualities and public regardednessqualities and public regardedness

the policy making process of tax reform in latin america

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valueadded tax

successful tax policy

personal income tax

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process of tax reform

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lower income rates