Ideology and Taxation in Latin America

Abstract

This paper examines the impact of ideology on tax revenues in Latin America, using a panel of seventeen countries from 1990 to 2010. As a first approach, a fixed-effects model is used to identify the impact of government ideology on taxation; left-leaning governments are associated with increases in total tax revenues and income tax revenues of 2.2 and 1.3 percent of GDP, respectively. There is no effect on revenues from VAT or social security taxes. To deal with endogeneity problems, an event study methodology is used to track the behavior of revenues around the time of the shifts to the left. A comparison of revenues immediately before and after the shift in government ideology shows that revenues and income tax revenues increase by 1.3 and 0.8 percent of GDP.
 JEL Classifications: H20, P16

Remittances and Revenue in Latin America, 1990–2017

“…Scholars focus on revenue totals because tax rate data for Latin America remains scarce and incomplete (Ha and Rogers 2017 ; Hart 2010 ; Stein and Caro 2017 ; Wibbels and Arce 2003 ). I follow this convention but do not operationalize revenue as a share of GDP.…”

“…Left parties view inequality as artificial and reversible through government intervention (Luna and Kaltwasser 2014 ). These parties seek equitable economic growth through progressive taxation on wealth to fund social programs while deemphasizing regressive consumption taxes (Hart 2010 ; Stein and Caro 2017 ). When infeasible, the left will use regressive indirect taxation to raise revenue but compensate with increased spending (Castañeda and Doyle 2019 ).…”

“…Based on this model, I argue that remittances increase government tax revenue when the right governs but decrease it under the left. This is because governments of the political left often emphasize direct taxes on wealth more than the center and right (e.g., Angelopoulos et al 2009 ; Hart 2010 ; Huber and Stephens 2012 ; Stein and Caro 2017 ). As remittances weaken demand for redistribution among transnational households, they may also dissuade the left from pursuing taxes on wealth to the degree that they might otherwise.…”