Governance, taxes, and tax reform in Latin America

In the 1980s, Latin American countries began to implement a set of tax reforms inspired in large part by the international financial institutions and ideas associated with the Washington Consensus. These reforms involved above all the simplification of tax structures and the removal of exemptions and special privileges; the replacement of trade taxes by value-added taxes; and an emphasis on improved tax administration. Although not fully implemented, these reforms have generally been useful. However, they have come at a price: other issues have been driven and kept off the tax policy agenda. The excluded issues include considerations of equity and redistribution; and a serious concern for governance questions – the interactions between tax policy and the legitimacy of governments and the policies they pursue. In a rather quieter way, many Latin American governments recently have initiated a series of “indigenous” tax reforms. These owe little to the support or urging of international financial institutions, are designed to deal with particular local problems, begin to address some of the more important political dimensions of tax reform, and have been modestly successful. These indigenous reforms provide a basis on which Latin American countries could build a more wide-ranging programme of tax reform tailored to regional and national circumstances. Such a programme could and should focus more on the political and governance dimensions of taxation and attempt to build something resembling national “social contracts” around issues of public revenue and expenditure.