Progressive tax policy and informal labor in developing economies

Abstract

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.

Opting Out of the Social Contract: Tax Morale and Evasion

“…It has implications for work on state capacity more generally (Kurtz, 2013;Soifer, 2015) together with work on the shape and evolution of tax structures across Latin America (e.g. Centeno, 1997;Wibbels and Arce, 2003;Ardanaz and Scartascini, 2013;Hart, 2010;Schneider, 2013;Bird and Zolt, 2015;Fairfield, 2015;Castañeda, 2017;Castañeda and Doyle, 2019). More specifically, we contribute to the burgeoning literature on the individual-level determinants of tax compliance (e.g.…”

“…However, some work has recently begun to focus on the other side of the equation -taxation -and the often uneven and regressive form that taxation assumes across the region (e.g. Wibbels and Arce, 2003;Hart, 2010;Ardanaz and Scartascini, 2013;Schneider, 2013;Fairfield, 2015;Bird and Zolt, 2015;Castañeda, 2017;Flores-Macías, 2018;Castañeda and Doyle, 2019). Most of this burgeoning literature has focused on the macrolevel determinants of taxation and cross-country variation in Latin America more generally.…”

“…Within the Latin American context, most work has focused on explanations for the variation in the provision of public goods, which is notoriously uneven (e.g., McGuire, 2014;O'Donnell, 1993). However, some work has recently begun to focus on the other side of the equation-taxation-and the often uneven and regressive form that taxation assumes across the region (e.g., Ardanaz & Scartascini, 2013;Bird & Zolt, 2015;Castañeda, 2017;Castañeda & Doyle, 2019;Fairfield, 2015;Flores-Macías, 2018;Hart, 2010;Schneider, 2013;Wibbels & Arce, 2003). Most of this burgeoning literature has focused on the macro-level determinants of taxation and cross-country variation in Latin America more generally.…”

“…This article makes a number of contributions. It has implications for work on state capacity more generally (Kurtz, 2013;Soifer, 2015) together with work on the shape and evolution of tax structures across Latin America (e.g., Ardanaz & Scartascini, 2013;Bird & Zolt, 2015;Castañeda, 2017;Castañeda & Doyle, 2019;Centeno, 1997;Fairfield, 2015;Hart, 2010;Schneider, 2013;Wibbels & Arce, 2003). More specifically, we contribute to the burgeoning literature on the individual-level determinants of tax compliance (e.g., Ballard-Rosa et al, 2017;Bergman, 2010;Duch & Solaz, 2015;Kuziemko et al, 2015;Luttmer & Singhal, 2014;Ronconi & Zarazaga, 2015) by focusing our attention on states where the benefits of paying taxes are not self-evident and, often, not desired.…”

From ‘beasts of burden’ to ‘backbone of society’: The fiscal forging of a new Bolivian middle class

“…Meanwhile income tax, which is a progressive tax, 3 constitutes a far smaller part of the revenue stream – in 2015 it represented 0.2% of GDP in Bolivia (compared with the OECD average of 8%; OECD, 2018: 124). This income tax ‘deficit’ is reflective both of labour informality in the country (Castañeda and Doyle, 2019) – Bolivia has one of the largest shadow economies in the world, although this has been shrinking in official figures since 2005 (Medina and Schneider, 2018) 4 – as well as of low taxes on high earners and capital rents (OECD, 2018: 128–31). Many economists (e.g.…”