The importance of taxing for development... the case of Latam

During the past year, and thanks to the funding of the Fundación Carolina, me and a colleague at the IIG, we have been able to research on the difficulties of reforming tax systems in the Central Andean region, more concretely: in Bolivia, Ecuador and Peru.

Why reforming? It seems pretty clear that these governments are incapable of obtaining the necessary resources to fulfill their main duties and responsibilities (those assigned by the society). In addition, in those countries there exists a widespread perception that taxes are collected in an inadequate manner (that is, inequitably and very complicating). The same negative perception appears when asked about public expenditures. The great majority of society perceive that taxes are spent inefficiently and rampant corruption facilitates misappropriation.

As a consequence, fiscal policy in these countries is trapped in a sort of vicious cycle by which people tend to do whatever they can to avoid paying taxes, whereas those in government lack the incentives to offer adequate public services such as education and health. The access to easy money, imposing taxes on activities to natural resources deepens these sort of problems.

Our main hypothesis relied on the idea that inequality and institutions (either formal and informal, and endogenously explained by this same inequality) play a great role in explaining the distortionary tax system prevalent in the region (low tax pressure, low redistribution, limited tax bases, progressive direct taxes on paper not in practice, tax system biased towards indirect taxes,...)

In a recent post on marginal revolution about economic heterogeneity in Latin America I came across this other interesting post on the necessity to spread the use of property taxes in developing countries.

Additionally, the necessity to achieve a new fiscal pact is achieving more and more importance in the developing agenda (especially in the LATAM region). The research department from the Inter-American Development Bank has recently edited a special issue on this important ingredient for the development recipe (here in English and in Spanish) which supposes an interesting start for those of you interested in this key issue!

Inequality lies in the heart of the "underdevelopment problems" in LATAM. Facing them becomes crucial, and constructing better public institutions with more resources seems to be a good first step! More on this issue to come!