The Policy Making Process of Tax Reform in Latin America

The Policy Making Process of Tax Reform in Latin America Mauricio CárdenasEduardo LoraValerie Mercer-Blackman

Outline • Introduction • Tax Policy Outcomes • Key Players • The PMP • Tax Policies’ Outer Features • Empirical Evidence

1. Introduction • Tax Reform / Tax Policy are ideal candidates for the PMP methodology • Outcome of complex intertemporal exchanges • Large number of actors • Good and successful tax policy is less about content and more about its outer features. (e.g. the ability to sustain agreements to raise taxation)

2. Tax Policy Outcomes The objectives of the reforms proposed by governments • Increase tax revenues (at low administrative cost) • Improve tax neutrality • Facilitate tax administration • Little emphasis on progressivity.

Import liberalization and globalization trends conditioned tax reforms Tariff Liberalization, Latin America 50 45 40 Average deviation 10 countries Average tariff 12 countries 35 30 25 20 15 10 5 0 1985 1986 1988 1990 1992 1993 1994 1995 1996 1997 1998 1 999 Note: The average of twelve countries includes Argentina, Bolivia, Brasil, Chile, Colombia, Costa Rica, Ecuador, Guatemala, Mexico, Peru, Uruguay and Venezuela. In calculating the deviati on, Costa Rica and Guatemala are excluded for lack of data. The value of the tariff deviation for 1985 is assumed to be the same as that of the next year. Source: IDB Research Department WP 466. See Appendix 1.

Lower income rates, higher VAT rates Tax Rates: Value-Added Tax, Personal Income Tax, Corporate Income Tax* 50% 16% LAC Personal Income Tax Rate (Avg.) Left Scale LAC VAT Rate (Avg.) Right scale 45% 15% 40% VAT Tax Rate Individual and Corporation's Tax Rate 35% 14% LAC Corporate Income Tax Rate (Avg.) Left Scale 30% 13% 25% 20% 12% 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Source: PriceWaterHouseCoopers: Individual Taxes and Corporation Taxes. Worldwide Summaries. Several years (*) Includes Argentina, Brazil, Chile, Colombia, Costa Rica, Ecuador, El Salvador, Guatemala, Honduras, Jamaica, Mexico, Nicaragua, Paraguay, Peru, República Dominicana, Trinidad and Tobago, Uruguay and Venezuela.

Personal Income Tax Rates Country 1985 1990 1995 2000 2002 Argentina 45% 30% 30% 35% 35% Bolivia 30% 10% 13% 13% 13% Brazil 60% 25% 35% 28% 28% Chile 50% 50% 45% 45% 40% Colombia 49% 30% 35% 35% 35% Costa Rica 50% 25% 25% 25% 25% Ecuador 40% 25% 25% 25% 25% El Salvador 60% 50% 30% 30% 30% Guatemala 48% 34% 30% 31% 31% Honduras 46% 46% 46% 25% 25% Jamaica 58% 33% 25% 25% 25% México 55% 35% 35% 40% 40% Nicaragua 53% 30% 25% 25% Paraguay 30% 30% 0% 0% 0% Peru 50% 45% 30% 20% 27% Dominican Republic 73% 73% 25% 25% 25% Trinidad and Tobago 70% 35% 38% 35% 35% Uruguay 0% 0% 0% 0% 0% Venezuela 45% 45% 34% 34% 34% Source: PriceWaterHouseCoopers: Individual Taxes. Worldwide Summaries. Several years Personal income tax rates have fallen in all countries

Corporate Income Tax Rates Country 1985 1990 1995 2000 2002 Argentina 33% 20% 30% 35% 35% Bolivia 30% 0% 25% 25% 25% Brazil 45% 40% 25% 25% 25% Chile 10% 10% 15% 15% 16% Colombia 40% 30% 35% 35% 35% Costa Rica 50% 30% 30% 30% 30% Ecuador 40% 25% 25% 25% 25% El Salvador 35% 30% 25% 25% 25% Guatemala 42% 34% 25% 31% 31% Honduras 46% 46% 40% 25% 25% Jamaica 45% 33% 33% 33% 33% México 42% 36% 34% 34% 35% Nicaragua 45% .. 30% 25% 25% Paraguay 30% 30% 30% 30% 30% Peru 55% 35% 30% 20% 27% Dominican Republic 49% 49% 25% 25% 25% Trinidad and Tobago 50% 40% 38% 35% 35% Uruguay 30% 30% 30% 30% 30% Venezuela 50% 50% 34% 34% 34% Source: PriceWaterHouseCoopers: Corporate Taxes. Worldwide Summaries. Several years Similarly for corporate income tax rates

Value-Added Tax Rates Country 1985 1990 1995 2000 2002 Argentina 18% 13% 21% 21% 21% Bolivia 10% 10% 13% 13% 13% Brazil 30% 30% 31% 31% 31% Chile 20% 18% 18% 18% 18% Colombia 10% 12% 14% 15% 16% Costa Rica 10% 10% 10% 13% 13% Ecuador 10% 10% 10% 12% 12% El Salvador 0% 0% 13% 13% 13% Guatemala 7% 7% 7% 10% 10% Honduras 5% 5% 7% 12% 12% Jamaica 0% 0% 13% 15% 15% Mexico 15% 15% 15% 15% 15% Nicaragua 15% 15% 15% 15% 15% Paraguay 0% 0% 10% 10% 10% Peru 11% 16% 18% 18% 18% Dominican Republic 6% 6% 8% 8% 8% Trinidad and Tobago 0% 15% 15% 15% 15% Uruguay 20% 22% 22% 23% 23% Venezuela 0% 0% 13% 15% 15% Source: PriceWaterHouseCoopers: Corporate Taxes. Worldwide Summaries. Several years And conversely for VAT rates

Personal Income Tax Exemption Level and Upper Income Bracket (Multiples of per capita GDP) Personal Exemption Level Upper Income Bracket Latin America 1985 1991 1997 2000 2001 1985 1991 1997 2000 2001 Argentina 0.8 0.5 1.2 1.3 1.7 21.4 13.7 14.5 15.5 16.5 Bolivia 1.0 0.5 … … … 10.1 0.5 … … … Brazil 0.3 1.2 2.1 1.7 1.5 10.1 2.8 4.2 3.3 3.1 Chile 0.2 2.3 0.1 0.1 0.1 2.8 22.6 1.3 1.2 1.2 Colombia 0.0 0.4 2.7 4.4 4.1 20.5 25.3 12.0 11.7 16.6 Costa Rica 1.2 2.9 1.1 0.8 0.8 1.4 5.3 5.6 4.1 3.7 Dominican Republic 1.1 0.2 0.1 2.6 2.3 413.5 74.3 34.3 6.5 5.8 Ecuador 0.4 2.9 1.8 0.9 2.4 29.2 35.8 22.7 11.3 8.3 El Salvador … 2.3 1.4 1.2 1.2 171.7 32.5 12.7 11.4 11.0 Guatemala 0.9 2.3 6.3 5.3 5.0 356.0 31.7 17.5 14.7 22.5 Honduras 0.0 6.9 5.2 3.9 3.6 600.4 686.8 103.4 39.1 36.0 Mexico 0.7 0.2 0.1 0.1 0.1 21.3 11.7 5.0 36.8 44.0 Nicaragua 1.7 … 6.6 8.3 7.7 56.9 9.9 47.4 49.9 61.2 Panama 0.3 0.5 0.9 0.9 0.9 89.0 97.8 63.1 58.9 57.8 Paraguay 0.5 … … … … 10.4 … … … … Peru … … 2.6 2.8 2.9 … … 20.1 21.5 22.3 Uruguay … … … … … … … … … … Venezuela … … 0.0 0.0 0.0 … … 0.0 0.0 0.0 0.6 1.8 2.1 2.3 2.3 121.0 75.0 24.2 19.0 20.7 Source: Stotsky, J and A. WodenMariam. IMF Working Paper WP/02/227. Central American Tax Reform: Trends and Possibilities Personal taxes: Fewer taxpayers, more effective tax rates

Financial and Fiscal Incentives to Production and Investment (2000) Tax incentives Horizontal tax Country Tax incentives to specific sectors to particular incentives regions Argentina Mining, forestry Bahamas Hotels, financial services, spirits and beer (a) X Barbados Financial services, insurance, information technology (b) X Belize Mining X Bolivia Mining Brazil (c) X Chile Forestry, oil, nuclear materials (d) X X Colombia (e) X Costa Rica Forestry, tourism Dominican Republic Tourism, agribusiness Ecuador Mining, Tourism El Salvador Guatemala Guyana Agribusiness Haiti (f) X Honduras Jamaica Motion picture industry, tourism, bauxite, aluminum, factory construction Mexico Forestry, motion picture industry, air and maritime (g) X transportation, publishing industry Nicaragua Tourism Panama Tourism, forestry Paraguay (h) (i) X X Peru Tourism, mining, oil (j) X Trinidad & Tobago Hotels, construction, (k) X Uruguay Hydrocarbons, printing , shipping, forestry, military (l) X industry, airlines, newspapers, broadcasters, theaters, motion picture industry Venezuela (n) (m) Hydrocarbons and other primary sectors X Source: IDB 2001. Table 17.3 in The Business of Growth. Economic and Social Progress in Latin America 2001 Report. Business taxation: too many exemptions

Tax Rev. (Avg.) Tax Rev. without cycle (Avg.) Tax Rev. (Med) Tax Rev. without cycle (Med.) Source: IMF. Data from Government Finance Statistics and Article IV. Several Years (*) Includes Argentina, Brazil, Chile, Colombia, Costa Rica, Ecuador, El Salvador, Guatemala, Honduras, Mexico, Nicaragua, Paraguay, Peru, Dominican Republic, Uruguay and Venezuela. Some progress in tax revenues (up to 1997) Tax Revenues as gdp percentage* (Average and Median) 0.17 0.16 0.15 0.14 0.13 0.12 0.11 0.1 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Tax Revenue as GDP percentage 2000-02 Vs Country 1985-89 1990-94 1995-99 2000-02 1985-89 Argentina 11.6% 11.6% 12.5% 9.5% -2.1% Bolivia 8.0% 9.9% 14.0% 13.1% 5.1% Brazil 16.5% 18.2% 19.7% 24.4% 7.9% Chile 19.3% 18.4% 18.7% 16.7% -2.6% Colombia 11.2% 11.8% 10.4% 12.9% 1.7% Costa Rica 20.2% 18.4% 17.9% 12.5% -7.7% Ecuador 14.4% 15.5% 15.0% 19.2% 4.8% El Salvador 12.3% 9.8% 11.6% 10.8% -1.5% Guatemala 7.9% 7.4% 8.9% 10.2% 2.3% Honduras 13.6% 15.5% 16.9% 16.2% 2.6% Jamaica 23.5% 21.4% 22.3% 25.6% 2.0% México 14.3% 13.5% 11.9% 12.0% -2.3% Nicaragua 25.3% 11.0% 13.6% 14.1% -11.2% Paraguay 8.5% 9.4% 10.6% 9.7% 1.2% Peru 10.8% 13.4% 14.8% 12.6% 1.9% Dominican Republic 11.8% 13.2% 14.8% 15.5% 3.8% Trinidad and Tobago 24.8% 19.2% 20.4% 15.3% -9.6% Uruguay 21.9% 25.7% 26.2% 24.0% 2.1% Venezuela 17.0% 15.9% 14.1% 11.9% -5.1% Source: IMF. Data from Government Finance Statistics and Article IV. Several Years Mixed evidence in terms of revenues

Tax Revenues Item 1985-1989 1990-1994 1995-1999 2000-02 Total Tax Revenue (% GDP) LAC average * 15.3% 14.5% 15.5% 15.2% LAC median * 13.8% 13.9% 14.8% 13.8% LAC average (1) 14.8% 14.5% 15.4% 15.2% LAC median (1) 13.7% 14.0% 14.9% 13.8% Income Tax Revenue (% GDP) LAC average * 2.6% 2.8% 3.5% 3.9% LAC median * 2.3% 2.0% 3.0% 3.4% LAC average (1) 2.6% 2.5% 3.0% 3.4% LAC median (1) 2.5% 2.1% 3.0% 3.3% VAT Tax Revenue (% GDP) LAC average * 3.2% 4.1% 5.2% 5.4% LAC median * 2.6% 3.6% 4.7% 5.0% LAC average (1) 3.0% 3.8% 5.0% 5.3% LAC median (1) 2.7% 3.4% 4.5% 5.2% Source: Own calculations based on IMF. Data from Government Finance Statistics and Article IV. Several Years (*) Includes Argentina, Brazil, Chile, Colombia, Costa Rica, Ecuador, El Salvador, Guatemala, Honduras, Jamaica, México, Nicaragua, Paraguay, Peru, Dominican Republic, Trinidad and Tobago, Uruguay and Venezuela. (1) Includes Argentina, Brazil Chile, Colombia, Costa Rica, Ecuador, Guatemala, Honduras, México, Nicaragua, Peru, Dominican Republic and Uruguay. Stability in revenues, changes in composition

Stability in revenues, changes in composition Tax Revenues (% GDP) 16% 14% Tax revenue/GDP 12% 10% 8% Other 6% VAT/GDP 4% 2% Income Tx/GDP 0% 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Source: IMF. Data from Government Finance Statistics and Article IV. Several Years. PriceWaterHouseCoopers: Summaries. Individual Taxes and Corporation Taxes. Worldwide. Several years (*) Includes Argentina, Brazil, Chile, Colombia, Costa Rica, Ecuador, El Salvador, Guatemala, Honduras, Jamaica, Mexico, Nicaragua, Paraguay, Peru, República Dominicana, Trinidad and Tobago, Uruguay and Venezuela.

The lack of progressivity: much ado about nothing?

3. Role of Key players in the tax PMP Ctry. Actor

Veto Player Index

Veto Players

Number of Effective Veto Players in the Tax Policy-Making Process, Selected Latin American Countries, Latest Date Costa Rica Brazil Colombia Argentina Paraguay Guatemala Venezuela Mexico Chile 0 0.5 1 1.5 2 2.5 3 3.5 4

4. Tax Policy PMP • Argentina: The executive initiates policies, but it requires the permission of most provincial governors, so that they instruct legislators to support the initiative. Their support is exchanged for political and fiscal favors. • In Brazi, as Werneck (2004) puts it: “The tax reform debate [became] a noisy clash of conflicting views, increasingly marked by a strong aversion towards revenue losses. There [was] fear on all sides”. Although everyone agrees that the indirect tax system in Brazil needs to be reformed to remove cascading taxes, no agreement on how to get there was reached. The constitution of 1988 granted the states much a freer hand to introduce changes in their VATs. • There has been a deliberate, although insufficient, effort to raise revenues in order to finance larger expenditures in Colombia. • In Costa Rica, one of the obstacles to introducing certain taxes has been the Constitutional Court (Sala Cuarta). For example, tax administration reform, introduced in 1994, increased the ability for the administration to sanction tax evaders, introduced the wealth tax, and allowed cross-checking of firms in the direct taxes chain. Most of the main provisions of this reform were declared unconstitutional. • President Portillo’s landslide victory in 1999 combined with an FRG majority in Congress suggested possibilities for rapid legislative action. However, under the Guatemalan constitution of 1985, passage of many kinds of legislation requires a two-thirds vote. Passage of such legislation was not possible, therefore, with FRG votes alone.

5. Outer features Tax policies’ Outer Features Definitions

Poor investment related qualities Tax Policies’ Outer Features Rankings 1= Minimum ; 4 = Maximum

Mediocre features, except for Chile Value of Outer Features 20 18 16 14 12 10 8 6 4 2 0 Venezuela Argentina Guatemala Colombia Paraguay Brazil Costa Rica Mexico Chile

Simple correlations 65% 25% Chile Correlation = 0,56 60% 55% 20% Costa Rica 50% Guatemala Brazil Colombia Chile 45% Costa Rica 40% Brazil 15% Venezuela VAT Productivity (Average 1985 - 2001) 35% Structural Tax Revenue (Average 1985-2002) Mexico Paraguay Mexico 30% Colombia Argentina 25% 10% Paraguay 20% Guatemala Argentina Correlation = 0,74 15% Venezuela 10% 5% 7 9 11 13 15 17 19 21 7 9 11 13 15 17 19 21 Quality of Outer Features Index Quality of Outer Features Index 50% 45% Chile Correlation = 0,60 40% Venezuela 40% Correlation = -0,80 30% Mexico Brazil 35% 20% Colombia Costa Rica Guatemala 10% 30% Argentina Argentina Paraguay Paraguay Business Tax Rate Total Change (1985-2001) 0% 25% Business Tax Rate Total Average (1985-2001) 7 9 11 13 15 17 19 21 -10% Colombia Mexico 20% -20% Guatemala -30% 15% Venezuela Chile -40% Costa Rica 10% Brazil -50% 7 9 11 13 15 17 19 21 Quality of Outer Features Index Quality of Outer Features Index

6. Empirical evidence Tax policies’ Outer Features Proxies

Main Types of Reform 1990-2002 (Absolute number of reforms in 17 countries) Gross Net (a) Tax system overhaul (0.2) 11 11 (b) VAT creation (0.2) 1 1 (c) VAT base broadening (0.1) 17 15 (d) VAT rate increase (0.1) 29 21 (e) Elimination of minor duties (0.1) 5 5 (f) Personal income tax base change (0.1) 14 14 (g) Personal income tax rate change/reduction (0.1) 16 8 (h) Corporate income tax base change (0.1) 9 7 (i) Corporate income tax rate change/reduction (0.1) 23 5 (j) Comprehensive administrative reform (0.1) 5 5 (k) Creation of other taxes (excises, bank debits, gross assets) (0.1) 9 9 Average of reform items by country 7.7 5.6 Average of reform years by country 4.2 Source: Own calculations as explained in text based on IMF Article IV Reports and questionnaires applied to Tax Administration officials in some of the countries. Measuring reform activity

Indicators of Tax Reforms and Outcomes Number of Amount of Change in years with Change in tax legislative neutrality legislative revenues 1990- Country activity, index, 1990- activity, 2002, % GDP 1990-2002 2002 1990-2002 Argentina 2.1 7 0.0% -0.05 Bolivia 0.3 3 4.9% -0.10 Brazil 0 0 5.6% 0.06 Chile 0.4 4 0.4% 0.07 Colombia 0.6 6 1.7% -0.05 Costa Rica 0.3 4 -6.8% 0.02 Dominican Republic 0.5 2 5.1% 0.33 Ecuador 0.7 6 1.0% 0.06 El Salvador 0.3 4 1.8% 0.25 Guatemala 0.9 5 3.8% 0.06 Honduras 0.7 6 1.3% 0.07 Mexico 0.1 6 -0.7% -0.01 Nicaragua 0.8 5 12.5% 0.28 Panama 0.2 2 Peru 0.9 4 0.4% 0.19 Paraguay 0.4 1 0.0% 0.28 Uruguay 0.4 5 1.1% 0.08 Venezuela 0.8 5 -7.7% 0.10 Averages 0.58 4.17 1.4% 0.10 Correlation with amount of legislative activity 1.00 0.58 -0.04 -0.11 Correlation with number of years with legislative activity 0.58 1.00 -0.20 -0.41 Have reforms paid off?

Data Definition: Dependent variables

Data Definition: Macro variables

Data Definition: Political variables

Data Definition: Political variables (cont.)

Explicative variables 1 2 3 4 5 6 7 8 9 10 Mahon's Tax Reform Index (Taxref) 0,259 0,303 0,124 0,542 0,883 0,86 0,602 0,129 0,263 0,304 (0,87) (1,00) (0,45) (1,20) (1,52) (1,43) (1,19) (0,41) (0,87) (0,99) 0,172** 0,163** 0,390*** 0,213** 0,233*** 0,277*** 0,172** 0,203*** 0,193*** 0,184*** (2,44) (2,40) (2,68) (2,52) (2,87) (2,95) (2,58) (2,65) (2,65) (2,61) Adjusted Fiscal Balance -0,044 -0,055 -0,071 -0,116 -0,378 -0,0418 -0,236 -0,039 -0,043 -0,054 (-0,36) (-0,45) (-0,59) (-0,66) (-1,32) (-0,11) (-1,06) (-0,33) (-0,36) (-0,46) Purchase Power Loss 0,048** 0,122** 0,0448** 0,0392* -0,003 0,0019 -0,002 0,0488** 0,0488** 0,119** (2,42) (2,58) (2,30) (1,69) (-0,12) (0,07) (-0,09) (2,41) (2,42) (2,48) Cycle (Log GDP) -0,014*** -0,008* 0,003 -0,0166*** -0,0145** -0,0136* -0,017*** -0,0142*** -0,0136*** -0,0079* (-3,09) (-1,71) (0,42) (-3,02) (-2,39) (-1,77) (-2,97) (-3,12) (-2,98) (-1,65) IMFcond -0,032** -0,0309 (-2,28) (-2,14) Administration Cycle Year -0,012** Administration Cycle Year*IMFcond1 (-2,37) 0,0122 0,017 Purchase Power Loss*IMFcond1 (0,57) (0,73) -0,0394* 0,011 0,0033 Ideology (-1,88) (0,28) (0,08) -0,167 -0,0155 Coalition (-1,17) (-0,93) 0,0076 -0,238 Effective Number of Parties (0,05) (-0,96) -0,0766 -0,0965* -0,0818 Polarization Index (-1,26) (-1,81) (-1,28) -0,392 Promises (-1,66) -0,297 Votes Incumbent (-0,73) 0,0019 Legislative Votes outgoing Incumbent (0,07) Democracy Index 0,0129 (0,81) Polity Index -0,0462* -0,0196* -0,0191* (-1,72) (-1,80) (-1,78) Executive Constrains Index 0,0308* 0,0191* 0,0187* (1,92) (1,76) (1,75) Openess of Executive Recruitment Index 0,0413** 0,027 -0,012 0,056** 0,101 0,47* 0,105** 0,0731* 0,0736*** 0,0584*** (2,08) (1,24) (-0,36) (2,45) (0,90) (1,97) (2,45) (1,69) (2,77) (2,07) Constant Adjusted R-square 0,1238 0,1439 0,1696 0,1690 0,1768 0,1803 0,1788 0,1416 0,1391 0,1546 Number of Obsevations 235 235 235 181 108 94 117 235 235 235 *** Significant at 1 percent ** Significant at 5 percent * Significant at 10 percent t-statistic in parenthesis Determinants of stability/adaptability

Tax Reform Dummy (=1 if Taxref different than 0) Explicative variables 1 2 3 4 5 6 7 8 9 1,992 4,285 4,44 2,603 2,471 2,291 5,535 12,566 5,817 Adjusted Fiscal Balance (0,59) (1,17) (1,21) (0,69) (0,55) (0,52) (1,21) (1,49) (1,24) 0,997** 0,866* 0,864* 0,244 0,627 0,698 1,334** 4,367*** 1,461** Purchase Power Loss (2,19) (1,80) (1,80) (0,40) (0,90) (1,14) (2,25) (3,03) (2,38) -0,130 0,197 0,146 1,012 -5,469 0,372 -0,832 7,258 -0,720 Cycle (Log GDP) (-0,09) (0,10) (0,08) (0,50) (-1,08) (0,15) (-0,38) (1,35) (-0,31) 8,592 Crisis (1,08) -1,82 Unemployment (-0,44) -9,067* -3,364 Social_expenditure (-1,79) (-0,79) 0,417* 0,228 0,482 -0,188 0,769** 0,566* 0,310 0,024 0,301 IMFcond (1,90) (0,94) (1,02) (-0,55) (2,18) (1,78) (1,18) (0,06) (1,14) 0,606*** 0,609*** 0,566*** 0,553** 0,431* 0,513** 0,747* 0,531** IMFdisb (2,97) (2,98) (2,73) (2,07) (1,75) (2,25) (1,82) (2,29) -0,199*** -0,185** -0,163** -0,187*** -0,155* -0,178** -0,213*** -0,311** -0,210*** Administration Cycle Year (-2,95) (-2,60) (-2,06) (-2,59) (-1,71) (-2,05) (-2,73) (-2,20) (-2,60) -0,114 Administration Cycle Year*IMFcond1 (-0,63) 1,817* Purchase Power Loss*IMFcond1 (1,74) -0,062 Coalition (-0,08) -0,019 -0,565* 0,047 Effective Number of Parties (0,26) (-1,87) (0,61,) -0,676 3,836** -0,715 Polarization Index (-1,24) (2,18) (-1,28) -0,390 Promises (-0,40) -2,295 Votes Incumbent (-0,79) 0,209 Votes Outgoing Incumbent (0,07) 0,941 Legislative Votes Outgoing Incumbent (0,60) 0,209 0,306 Democracy Index (0,07) (0,96) 0,941 -0,0238 Polity Index (0,60) (-0,10) -0,543** Executive Constrains Index (-2,47) 0,3196 Openess of Executive Recruitment Index (1,61) -0,311 -0,475* -0,535** -0,342 0,292 -0,267 -0,345 0,306 - Constant (-1,33) (-1,89) (-1,99) (-1,28) (0,49) (-0,70) (-0.85) (0,14) - Adjusted R-square 0,0009 0,0002 0,0004 0,0002 0,0080 0,0065 0,0011 0,684 0,0019 Number of Obsevations 235 219 219 219 138 153 190 95 190 *** Significant at 1 percent ** Significant at 5 percent * Significant at 10 percent t-statistic in parenthesis Determinants of stability/adaptability

Tax policies’ Outer Features Proxies Outer Features Proxies Stability Mohan's Index of Tax Reform Adaptability/flexibility Coordination/coherence Lora's Index of Tax Neutrality Investment-related qualities Income and VAT Productivities Public regardedness

Neutrality’s mixed evidence

Neutrality Tax Index (Avg.) 53% 48% 43% 38% 33% 28% 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Source: IMF. Data from Government Finance Statistics and Article IV. Several Years. PriceWaterHouseCoopers: Individual Taxes and Corporation Taxes. Worldwide Summaries. Several years (*) Includes Argentina, Brazil, Chile, Colombia, Costa Rica, Ecuador, El Salvador, Guatemala, Honduras, Jamaica, Mexico, Nicaragua, Paraguay, Peru, República Dominicana, Trinidad and Tobago, Uruguay and Venezuela. Neutrality: interrupted progress NTI= Average (Inc. Prod. Index + VATP + Corp. Tax Rate Index + Per. Tax Rate Index + VAT Tax Rate Index)

Tax Neutrality Index Explicative variables 1 0,652** Adjusted Fiscal Balance (2,13) -0,070** Purchase Power Loss (-2,15) -0,116 Cycle (Log GDP) (-0,89) 0,003 IMFcond (0,32) -0,0124 IMFdisb (-0,92) -0,078*** Coalition (-3,19) 0,244*** Polarization Index (3,45) 0,108*** Promises (3,01) -0,097*** Democracy Index (-3,75) 0,0546*** Polity Index (3,57) 0,730*** Constant (9,45) Adjusted R-square 0,7021 Number of Obsevations 117 *** Significant at 1 percent ** Significant at 5 percent * Significant at 10 percent t-statistic in parenthesis Determinants of coordination/coherence

Tax policies’ Outer Features Proxies Outer Features Proxies Stability Mohan's Index of Tax Reform Adaptability/flexibility Coordination/coherence Lora's Index of Tax Neutrality Investment-related qualities Income and VAT Productivities Public regardedness

LAC's Income Tax Productivity (Avg.) 16% 15% 14% 13% 12% 11% Income Tax Revenue / GDP ITP = 10% (Per. Inc. Tax Rate + Corp. Inc. Tax Rate) / 2 9% 8% 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Source: IMF. Data from Government Finance Statistics and Article IV. Several Years. PriceWaterHouseCoopers: Individual Taxes and Corporation Taxes. Worldwide Summaries. Several years (*) Includes Argentina, Brazil, Chile, Colombia, Costa Rica, Ecuador, El Salvador, Guatemala, Honduras, Jamaica, Mexico, Nicaragua, Paraguay, Peru, República Dominicana, Trinidad and Tobago, Uruguay and Venezuela. Income taxes: productivity on the rise

LAC's VAT Productivity (Avg.)* 38% 36% 34% 32% 30% 28% 26% VAT Revenue / (GDP+M-X) VATP = 24% (VAT Rate) 22% 20% 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Source: IMF. Data from Government Finance Statistics and Article IV. Several Years. PriceWaterHouseCoopers: Individual Taxes and Corporation Taxes. Worldwide Summaries. Several years (*) Includes Argentina, Brazil, Chile, Colombia, Costa Rica, Ecuador, El Salvador, Guatemala, Honduras, Jamaica, Mexico, Nicaragua, Paraguay, Peru, República Dominicana, Trinidad y Tobago, Uruguay y Venezuela. VAT: important productivity gains

Income Tax Productivity Explicative variables (1) 1,362*** Adjusted Fiscal Balance (3,98) -0,167*** Purchase Power Loss (-3,87) -0,272 Cycle (Log GDP) (-1,38) -0,038*** Effective Number of Parties (-2,98) 0,103* Polarization Index (1,73) -0,131 Votes Incumbent (-1,13) -0,002*** Democracy Index (-5,24) 0,465*** Constant (6,02) Adjusted R-square 0,7536 Number of Obsevations 175 *** Significant at 1 percent ** Significant at 5 percent * Significant at 10 percent t-statistic in parenthesis Determinants of investment-related qualities and public regardedness

Determinants of investment-related qualities and public regardedness VAT Productivity Index Explicative variables 1 2 3 0,494 0,484 0,074 Adjusted Fiscal Balance (0,88) (0,84) (0,15) -0,240*** -0,246*** -0,179* Purchase Power Loss (-3,08) (-3,16) (-1,88) 0,320 0,324 0,062** Cycle (Log GDP) (1,48) (1,47) (2,41) 0,061** 0,055** 0,047* IMFcond1 (2,56) (2,34) (1,84) 0,019 IMFdisb (0,79) 0,000 Administration Cycle Year (0,09) 0,032** 0,033** 0,031** Ideology (2,58) (2,62) (2,60) 0,050*** 0,051*** 0,038** Effective Number of Parties (2,79) (2,81) (2,26) -0,660*** Votes Incumbent (-3,25) -0,018** -0,017* -0,012 Polity Index (-2,13) (-1,92) (-1,23) 0,060** 0,0598** -0,048* Executive Constrains Index (2,53) (2,47) (1,67) -0,043 -0,06 0,275* Constant (-0,33) (-0,46) (1,97) Adjusted R-square 0,7120 0,7133 0,820 Number of Obsevations 165 165 148 *** Significant at 1 percent ** Significant at 5 percent * Significant at 10 percent

The Policy Making Process of Tax Reform in Latin America