Recent research in political science and economics suggests that high inequality can undermine democracy and hinder growth and development. Accordingly, scholars are paying increasing attention to poverty reduction and redistribution in developing countries. Taxation is critical for these goals. First, tax revenue must undergird spending, since fiscal discipline is essential for economic stability and development. Second, progressive taxation can make a direct contribution to redistribution.
Strengthening tax capacity is particularly important in Latin America, the most unequal region in the world. Because income and profits are so concentrated, revenue to support social spending and redistribution must come from upper-income groups. However, taxing elites is a difficult political challenge.
My dissertation explores the distributional politics of taxation in Latin America through comparative research on Chile, Argentina, and Bolivia. When and how do politicians attempt to increase taxation of economic elites, and under what conditions can they succeed? Which groups oppose different kinds of reforms, and how do they exert influence? What are the prospects for constructing coalitions to pass reform?
Tax policy outcomes in recent years have varied significantly across these countries. For example, whereas Chile’s corporate tax rate remains the lowest in Latin America, Argentina’s is now the highest. Chile’s tax agency has only limited access to bank information, which is critical for controlling evasion, but Argentina’s tax agency now has complete and automatic access. I explain these and other tax policy outcomes by analyzing different sources of business power and by examining strategic interactions between the executive, opposition parties in Congress, and business associations.
The Tinker and Bridges 2008 Summer Field Research Travel Grant allowed me to conduct a month of follow up research in Chile and Argentina. The goals of my research in Chile were to obtain additional quantitative data on the distribution of income and taxes paid, and to interview policymakers, businessmen, and legislators regarding a recent reform initiated by the Bachelet administration to reduce a sales tax benefit for purchasing homes that disproportionately benefited members of the top income decile and cost the state significant resources. I was able to achieve both of these goals. In Argentina, my primary objective was to understand how and why the politics of export taxes changed dramatically in March 2008, when producers staged a series of massive strikes that ultimately forced the government to annul the tax increase on soy exports that had provoked them. In this remainder of this report, I provide an overview of my work on export tax policy in Argentina.
Since 2002, export taxes on commodities such as soy have allowed Argentina to extract major amounts of revenue from agriculture—a sector that historically paid very low taxes relative to its weight in GDP. Export taxes were imposed in the aftermath of the 2001 crisis, which involved default on the foreign debt, collapse of the banking system, and abandonment of the Convertibility regime, which had pegged the peso to the dollar. Depreciation of the peso and increasing international prices for soy and grain created windfall profits for the agricultural sector, which the state tapped through export taxes. In addition to raising revenue, export taxes suppressed prices for basic consumer goods and thereby helped to contain the growth of poverty. Argentina is a major exporter of wheat and meat, which are also key wage goods, so when exports become more profitable, domestic prices rise accordingly. Both the Nestor Kirchner administration and the Cristina Kirchner administration maintained and increased the export taxes after the crisis had passed. Export tax revenue helped to fund social spending for unemployed workers and sustain the fiscal surplus, which was critical for maintaining macroeconomic stability and the Kirchners’ economic model more broadly, which proved highly successful in terms of growth and poverty reduction at least up through 2005. Although orthodox economics disapprove of export taxes because they are distortionary, there is no question that they contributed significantly to Argentine’s greatly increased revenue capacity.
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The Presidential Palace in Argentina. Cristina Kirchner's administration unwittingly provoked a major conflict with agricultural producers in 2008 when export taxes on soy were increased to 44%.
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Although producers always opposed the export taxes, they were unable to exert influence in this policy area from 2002-2008. First, their complaints that higher taxation would impose an unmanageable burden on producers and lead to reduced investment and production were not credible. Soy in particular remained highly profitable throughout this period, and for that reason, the Kirchner administration correctly anticipated that producers would continue to invest even if taxes were increased. Tax increases usually accompanied increases in international prices, which compensated their impact on producers. Second, the producers did not have affective ways to influence policy other than trying to convince policymakers that tax increases would generate negative economic consequences. Not only did the producers lack ties to parties in Congress, but also export tax policy in Argentina legally falls within the purview of the executive branch alone. Further, organizational fragmentation and differences of interest among the producers precluded effective collective action. The four producers associations in Argentina represent different kinds of producers: the SRA represents the largest producers, the CRA represents large but somewhat smaller producers, Coninagro represents cooperatives, and the FAA represents small producers. Not only did these different associations often have different interests, but they also disagreed on appropriate strategies for influencing policy. Whereas the CRA and FAA frequently called strikes to protest policies that the agricultural sector disliked, the SRA and Coninagro consistently declined to participate. Moreover, the CRA and the FAA usually failed to coordinate protests.
This situation changed dramatically in 2008, when Christina Kirchner increased export taxes in March. The reform provoked widespread rejection and catalyzed unity among the four associations on strategies as well as goals for the first time in recent history. The 2008 reform stimulated unprecedented opposition because of its magnitude—export taxes reached 44%, and the reform made clear that rates would continue to increase as international prices increased—in combination with other accumulated grievances. These grievances included two export tax increases during the previous year, along with non-orthodox state interventions in wheat, meat and milk markets intended to control domestic prices. The 2008 reform in and of itself might not have been sufficient to spark mass protest in the absence of these other problems, given that as before, soy remained highly profitable for most producers despite the tax increase.
Unity and mass mobilization dramatically increased the producers’ power by allowing them to stage a series of production strikes of unprecedented magnitude and duration that ultimately forced the administration to reverse the tax increase. These strikes were not simply mass demonstrations; they entailed active use of “economic power” by halting commercialization. The producers brought the agriculture sector to a standstill and inflicted heavy costs throughout the country: exporters could not purchase goods, and supply lines to the urban centers were cut, leading to food shortages and prices increases. After three months of economically and politically costly stalemate with the producers, the Kirchner administration sent the text of the tax increase resolution to Congress in an effort to legitimate the legislation. However, Congress rejected the proposal by a narrow margin. Legislators’ desire to definitively end the crisis in the context of the producers’ threats that the strikes would continue otherwise, along with intensive and highly coordinated lobbying by the producers’ associations, secured the government’s defeat.
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