The Political Economy of Fiscal Reform in Brazil: The Rationale for the Suboptimal Equilibrum

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Documents published in the IDB working paper series are of the highest academic and editorial quality. All have been peer reviewed by recognized experts in their field and professionally edited. The views and opinions presented in this working paper are entirely those of the author(s), and do not necessarily reflect those of the Inter-American Development Bank, its Board of Executive Directors or the countries they represent. This paper may be freely reproduced provided credit is given to the Inter-American Development Bank. Terms of use: Documents in Abstract *This project examines fiscal reforms in Brazil since the 1990s, particularly in taxation, budgeting, and fiscal federalism. While recentralizing fiscal authority and massively expanding the extractive capacity of the state, policymakers chose not to revamp an inefficient tax system that has nonetheless proven capable of generating high levels of revenue. In budgeting, the economic crises of the mid1990s prompted the government to rein in subnational fiscal imbalances but discouraged policymakers from introducing major changes in the tax system. As the executive derives utility from fiscal stability and inflation control because of electoral incentives and credibility gains in international markets, reform initiatives can generate political benefits for incumbent politicians. The paper finally argues that the Achilles' heel of the sustainability of the Fiscal Responsibility Law is its enforcement technology: the Tribunais de Contas.JEL Classifications: H3, H77, H83, H71

Explaining Changes in Tax Burdens in Latin America: Does Politics Trump Economics?

“…Our results are in line with evidence coming from country studies (Bonvecchi et al, 2014;Magar, Romero and Timmons, 2009;Melo, Pereira and Souza, 2010;Olivera, Pachón and Perry, 2010), and with evidence coming from the 1930s and 2008 global financial crises 2…”

Explaining Changes in Tax Burdens in Latin America: Does Politics Trump Economics?

“…In Brazil, crises also favored increasing revenues, with the VAT and PIT reformed at the onset of the crisis (Melo, Pereira, and Souza, 2010).…”

Tax Reforms in Latin America in an Era of Democracy

“…Other recent and more detailed case studies are Olivera, Pachón and Perry (2010), which looks at Colombia after the constitutional reform of 1991; Bonvecchi (2010), which explores the experience of Argentina between 1988 and2008;Melo, Pereira and Sousa (2010), which explores the tax expansion in Brazil of the last two decades; and Magar, Romero and Timmons (2010), which explores the ability-and inability-of presidents to reform taxes in Mexico after the democratic transition. Case studies can be a good complement to our line of work by offering a more detailed perspective that does not suffer from the problems derived from aggregating the information from different countries.…”

“…Olivera, Pachón and Perry (2010) find support for the hypothesis that increased political fragmentation and limited unilateral executive power after the 1991 constitutional reforms restricted the extent of tax reforms in Colombia, and it only allowed for piecemeal reforms during crisis conditions. Melo, Pereira and Sousa (2010) show that reforms in Brazil have been geared towards generating high levels of revenue but tax overhauls have greatly discouraged policymakers from introducing major changes in the tax system. The data we present in this paper show this pattern starkly.…”