Business interest groups are crucial actors for tax policy-making, but it is still unclear under which conditions they are more successful than politicians in shaping taxation. This article argues that centralized coordination and high-levels of policy integration make business interest groups more influential in the tax policy-making process. If there is no ideological convergence between agenda-setters and business, highly centralized, and well-integrated business interest groups are more successful in blocking or softening revenue-raising tax reforms, or simply transferring tax burdens to consumers or non-organized citizens. To evaluate this theoretical framework, I have compiled an original data set on business groups and associations for 18 countries in Latin America between 1990 and 2010. This theory uncovers a strong link between the patterns of business coordination and the feasibility of implementing distributive tax policies. This article also contributes to the study of business politics beyond the limited sample of developed countries.

Governments in many industrializing democracies face difficult policy trade‐offs. Liberalization and informality have placed electoral pressure on them to expand noncontributory social spending. However, governments in developing democracies face constraints when attempting to finance this expansion. In some countries, the informal labor market is very large, thereby undermining the revenue that can be collected through income tax. We argue that this has given rise to a paradoxical situation. Left governments in developing democracies with large informal labor markets have a strong electoral incentive to expand welfare regimes to previously excluded outsiders, but to fiscally underwrite this expansion, they have increasingly been forced to fund their redistributive strategies via a regressive policy instrument, indirect consumption taxation. We examine this argument for a sample of 17 Latin American countries between the years 1990 and 2016. Our results suggest that labor informality forces left governments to turn to indirect taxation.

We examine the individual-level determinants of tax morale in low-capacity states, specifically Latin American countries, where the social contract is often perceived as fractured. We argue that individuals in such states perceive the social contract as an agreement to which they can opt in or opt out. Those who choose to opt out prefer to substitute state-provided goods for private providers, rather than pay for public goods through taxes or free ride to receive those goods. Through a list experiment conducted in Mexico City, we demonstrate that willingness to evade taxes is highest when individuals have stepped outside of the social contract. More traditional indicators of reciprocity—such as socioeconomic status and perceptions of corruption—are not significant. We bolster our experimental results with observational data from 17 Latin American cities; those with access to employer-sponsored insurance are more willing to evade tax.

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