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Business Power and Tax Reform:
Taxing Income and Profits in Chile
and Argentina
Tasha Fairfield
This article examines efforts to increase taxation of highly concentrated, undertapped income and profits in Latin America in the
aftermath of structural adjustment. Argentina has advanced further
than Chile in two policy areas: corporate taxation, which taps firmlevel profits; and tax agency access to bank information, which
helps reduce income tax evasion. These outcomes are explained by
drawing on the classic concepts of business instrumental power,
which entails political actions, and structural power, which arises
from investment decisions. In Chile, strong instrumental power
removed reforms in both areas from the policy agenda. In
Argentina, much weaker instrumental power at the cross-sectoral
level facilitated corporate tax increases. Bank information access
was expanded after Argentina’s 2001 crisis weakened the financial
sector’s instrumental power and reduced structural power.
ncreasing tax revenue is widely acknowledged as imperative for
development and redistribution in Latin America, the most unequal
region in the world. Because income distributions are so top-heavy, this
task, by definition, entails tapping the resources of economic elites. In
particular, highly concentrated income and profits constitute a major,
undertapped revenue base that could support higher social spending
(Perry et al. 2006; Sabaini et al. 2006; Barreix et al. 2006). Progressive
taxation can also make a direct contribution to redistribution (Zee 2004;
Piketty and Saez 2006); many of the region’s tax systems are instead
regressive (Chu et al. 2000; Sabaini et al. 2006). Yet taxing economic
elites is a difficult challenge because they are often well positioned to
prevent reform.
This article examines efforts to increase taxation of income and
profits in Chile and Argentina, two countries that experienced continual
revenue needs in the 1990s and early 2000s. In Chile, center-left governments sought revenue to fund social spending while maintaining
fiscal discipline. Although Chile’s poverty rate has greatly declined, beneficiaries of targeted spending programs remain in precarious economic
situations, inequality is still extremely high, and limited tax revenue has
constrained expansion of social spending. In Argentina, governments
sought revenue in the 1990s to maintain fiscal balance and sustain con-
© 2010 University of Miami
vertibility, which pegged the peso to the dollar and tied monetary
expansion to growth in reserves. After the 2001 economic crisis, governments sought revenue to reestablish fiscal solvency and to finance
social services and state expansion.
Governments in each country considered reforms in two key policy
areas: corporate taxation and tax agency access to bank information.
Corporate taxation taps profits at the firm level; bank information access
deters and facilitates detection of personal income tax evasion. Reforms
in both areas were marginal in Chile but significant in Argentina.
Whereas Chile’s corporate tax rate remains the lowest in Latin America,
Argentina’s is now the highest.1 Chile’s corporate tax revenue stagnated
around 2.6 percent GDP after 1990, but incremental rate increases and
reforms that closed loopholes contributed to a gradual increase in
Argentina from under 1 percent GDP in 1992 to 3.7 percent GDP in
2005. Chile’s tax agency still lacked access to checking account information as of mid-2009, but Argentina’s tax agency gained automatic
access to all relevant bank information by 2006, making it more powerful in this regard than many European tax agencies.
These outcomes are surprising, given prevailing understandings of
state capacity and taxation in these countries. Overall, state capacity is
viewed as much stronger in Chile than in Argentina. In fact, Chile’s tax
agency was long considered the best in Latin America by far, whereas
historically, Argentina’s was quite ineffective at collecting taxes
(Bergman 2001). Argentina has also been plagued by institutional, political, and economic instability (Spiller and Tommasi 2007; Levitsky and
Murillo 2005), whereas Chile has enjoyed notable stability in all these
aspects since the 1990 democratic transition. Recent scholarship argues
that instability shortens the executive’s time horizons and creates incentives to rely on taxes that are easy to collect, instead of taxing income
and profits and fortifying tax administration (Melo 2007). However,
Argentina increased corporate taxation more than Chile, and Argentina’s
tax agency is now more powerful than Chile’s, not only in terms of
access to bank information, but in other aspects as well.
These outcomes are also unexpected in light of recent research on
business cohesion and tax policy. Weyland (1997) and Lieberman (2003)
argue that cohesion facilitates progressive taxation, whereas fragmentation hinders redistribution. In contrast, this article argues that business
cohesion in Chile helped preclude progressive tax increases after 1990,
while business fragmentation in Argentina gave policymakers much
greater leeway for passing such reforms.
To explain tax policy outcomes, this study employs the classic concepts of business’s instrumental power and structural power. Instrumental power entails concerted political actions to influence policy.
Structural power arises from a perceived threat that a reform will lead
to reduced investment. When either instrumental or structural power is
strong, taxing economic elites will be difficult, and progress will tend to
be marginal. If both types of power are strong, business will wield even
greater influence. Instrumental and structural power can vary not only
across countries, but also across sectors and over time.
In Chile, this article will argue, strong instrumental power created
political constraints that removed corporate tax increases and bank
information access from policymakers’ agenda. In contrast, much
weaker instrumental power at the cross-sectoral level in Argentina facilitated corporate tax increases. The financial sector’s instrumental power
and a perceived disinvestment threat constrained tax agency access to
bank information in Argentina during the 1990s, but reform proceeded
without difficulty when both instrumental and structural power declined
after Argentina’s 2001 economic crisis.
Chile and Argentina form a fruitful country pair for comparison.
They share similar levels of development (GDP per capita), extensive
integration into international markets during the 1990s, and similar tax
systems. Both countries relied heavily on regressive consumption taxes
after structural adjustment, and the central government, the focus of this
research, collects the vast majority of tax revenue in each country, even
though Argentina is a federal state. In addition, a Chile-Argentina comparison holds constant several institutional factors that may affect
prospects for reform. In both countries, fiscal policy authority is concentrated in a single ministry, executives have strong formal legislative
powers, and party systems are comparatively stable, with high party discipline and low levels of fragmentation. Where these features are not
present, government reform proposals may be difficult to pass regardless of their content, due to the existence of multiple veto players and
the likelihood of weak support in Congress.
This article emphasizes the importance of business politics, “a relatively neglected area of research” (Schneider 2004). Business, whether
organized in associations or in the form of individual firms and
investors, is a key actor in tax politics. Many taxes directly affect profits, and business associations may defend the interests of upper-income
individuals as well as corporations. Yet the role of business is often
ignored in literature on taxation and state capacity and in analyses by
financial institutions. The classic instrumental and structural power
framework has not been systematically applied in literature on economic reforms in Latin America.2 Yet it provides an analytically elegant
and insightful way to encompass a wide range of causal processes
through which business may affect reform outcomes.
Political scientists have conceptualized two types of power that correspond to different means of influence: instrumental power (Mills 1956;
Miliband 1969) and structural power (Block 1977; Lindblom 1977; Przeworski and Wallerstein 1988). Instrumental power entails deliberate
political action to effect policy, such as lobbying. The sources of instrumental power can be classified as either relationships with decisionmakers that can create bias in favor of business interests, or resources
that help business pursue its interests more effectively.
Relationships with policymakers that create instrumental power
include recruitment into government, government-business concertation, and partisan linkages. Recruitment into government, whereby
business leaders receive high-level executive branch appointments,
allows business to participate directly in policymaking. Bipartite concertation between government and business associations can create
incentives for the executive to cede on issues that affect core business
interests, since conflict with business in a sensitive policy area may disrupt productive collaboration in other policy areas.3 Partisan linkages
describe the relationships between business and right-wing parties
whose core constituencies are economic elites (Gibson 1996). Partisan
linkages provide representation of business interests where right parties are electorally significant. Among various resources that afford
instrumental power, this study focuses on cohesion. When business is
cohesive, it can coordinate opposition to reform. Cohesion can legitimate business demands and improve business’s bargaining position.
The more sources of instrumental power, the more likely that business
will be able to influence policy.
Instrumental power can act at various stages of the policy process.
It can help business secure concessions after a reform has been proposed. Instrumental power may also restrict the executive’s agenda—the
set of reforms considered as feasible options. If policymakers anticipate
that a reform will entail a major political battle, they may rule it out as
unfeasible or not worth the effort.
Structural power arises from a perceived disinvestment threat.
According to the classic conceptualization, market democracies are
dependent on capitalists, who invest on the basis of the logic of profitability. When reforms curtail profits, capitalists respond by reducing
investment, and politicians pay the price for declining growth and prosperity at the polls. Politicians anticipate this scenario and avoid reforms
that may provoke disinvestment. In contrast to instrumental power, structural power does not require political activity to influence policy. Instead,
as Hacker and Pierson observe, “the pressure to protect business interests is generated automatically and apolitically. It results from private,
individual investment decisions taken in thousands of enterprises, rather
than from any organized effort to influence policymakers” (2002, 281).
Structural power acts primarily by restricting the agenda. If policymakers anticipate that a reform will stimulate reduced investment in an
important sector or in the economy more broadly, they may rule it out
for fear of harming growth and employment. Analyzing policymakers’
decisionmaking processes, their perceptions about the consequences of
the reform in question, and the credibility of disinvestment threats is
therefore critical for assessing whether or not structural power influences policy.4
Instrumental and structural power may be mutually reinforcing.
Lobbying, which falls into the domain of instrumental power, can augment perceptions that a reform will cause disinvestment; i.e., structural
power. Likewise, policymakers may grant business more extensive
access and participation, which enhances instrumental power, when
they are concerned about investment.
Structural and instrumental power, nevertheless, are independent
and need not covary. Yet the literature on business politics in Latin
America does not always draw a clear distinction between these two
concepts. Some authors define structural power in terms of factors like
concentration of production and profitability (Etchemendy 2004,
121–22), but those factors do not indicate a disinvestment threat.
Instead, they may indicate lobbying capacity (Etchemendy 2004,
122–23). Concentration, for example, can contribute to cohesion, a
source of instrumental power. But while “structural” factors may contribute to instrumental power, structural power and instrumental power,
under the classic definitions, are conceptually distinct—each entails a
different means of influence.
Instrumental power and structural power can vary across sectors or
policy areas and over time. Business may have instrumental power at
the cross-sectoral or sectoral level. Strong instrumental power at the
cross-sectoral level can block reforms that affect shared business interests. Cross-sectoral instrumental power may even block sector-specific
reforms. Alternatively, a sector may have sources of instrumental power
that allow it to influence reforms affecting its own sectoral interests,
even if business’s cross-sectoral instrumental power is weak. Some
sources of instrumental power, like partisan linkages and governmentbusiness concertation, can be fairly stable over time, while others, like
recruitment into government, may vary across presidential terms.
Structural power, meanwhile, varies according to policymakers’
expectations about how investors will respond to reform and their
assessments of the economic impact of disinvestment. Country-level factors like the tax system, the broader policy environment, or sensitivities
of investors shaped by historical experience can all affect the likelihood
that a particular reform will provoke disinvestment. Structural power
varies across policy areas, since different reforms may affect, or convey
different signals to, investors with different types of assets (Maxfield
1997, 38–39). Structural power may be strongest during recessions,
when policymakers prioritize growth and job creation (Smith 2000,
148–49). But economic crisis may reduce structural power (Block 1977;
Vogel 1987, 394; Akard 1992, 609); if investment has already fallen dramatically, additional disinvestment may be irrelevant (Hacker and Pierson 2002, 297).
Instrumental power explains most of the national-level variation in
corporate taxation and bank information access across the countries
examined (see table 1). In Chile, strong instrumental power removed all
but marginal reforms from the agenda in both policy areas. Strong
instrumental power arose from cross-sectoral cohesion, partisan linkages, and government-business concertation. In Argentina, weak instrumental power at the cross-sectoral level, due to business fragmentation
and the absence of an electorally relevant right party, facilitated significant corporate tax reform. Weak instrumental power at the sectoral
level, as well as the cross-sectoral level, facilitated tax agency access to
bank information after 2001. The financial sector, which held a direct
stake in this policy area, was a weak political actor after Argentina’s
financial meltdown. In each of these four cases, structural power was
weak because policymakers did not anticipate disinvestment in
response to reform.
In the case of bank information access during the 1990s in
Argentina, structural power, arising from a credible threat that investors
would remove their savings from the banks, played an important role in
hindering reform. The financial sector’s strong instrumental power,
based on recruitment into government, also discouraged reform.5 How42 LATIN AMERICAN POLITICS AND SOCIETY 52: 2
Table 1. Business Power and Tax Reform Outcomes, 1991–2008
Corporate Tax Bank Information Access __________________ _____________________________
Argentina __________________
Chile Argentina Chile 1990s Post-2001
Instrumental Strong Weak Strong Strong Weak
Cross-sectoral Cross-sectoral Sectoral level
level level (finance)
Structural power Weak Weak Weak Strong Weak
Outcome Marginal Significant No reform No reform Significant
reform reform reform
ever, both structural power and the financial sector’s instrumental power
declined dramatically after 2001, due largely to the consequences of the
2001 crisis.
A number of alternative explanations from the literature on tax
policy and business power fail to account for the outcomes observed in
these cases. Several recent studies present rival hypotheses regarding
business cohesion and policy influence. Weyland and Lieberman maintain that elite cohesion facilitates progressive taxation. Drawing on the
work of Mancur Olson, Weyland (1997) argues that fragmentation discourages business from coordinating around shared, long-term interests
in fiscal stability. Each sector instead resists tax increases. Encompassing
associations, in contrast, facilitate tax increases by streamlining bargaining and making agreements enforceable, as argued in the literature on
corporatism. Likewise, Lieberman (2003) argues that when elites are
regionally or ethnically divided, each subgroup opposes taxation, perceiving that the benefits accrue to others at its own expense, whereas
when elites share a common identity, they can agree to pay higher
taxes. Smith, meanwhile, maintains that cohesion does not enhance
business influence (2000, 8). In the United States, he argues, issues that
unite business are highly salient for voters, so politicians respond to
their constituencies, not business, on these issues.
In contrast to these authors’ predictions, corporate taxes increased
significantly in Argentina, a state with politically salient regional divisions where business is sectorally divided and has difficulty coordinating opposition to reforms, whereas corporate tax increases were marginal in Chile, where regional divisions are less relevant; a strong,
economywide business association exists; and business tends to be
highly united on economic policy.
Weyland’s and Lieberman’s arguments have limited scope because
tax preferences cannot be predicted from business organization or levels
of cohesion alone. Many factors affect business’s preferences and strategic calculations; if business opposes a reform, cohesion strengthens its
ability to resist. Smith’s logic, meanwhile, does not always hold. Politicians can win votes based on factors other than policy positions, such
as clientelism. They may therefore escape punishment at the polls if
they side with business against popular tax increases. The argument
advanced in this article, that unity increases instrumental power and hinders progressive reform, agrees with earlier work by Ascher (1984, 40)
and Frieden (1991, 33) on Latin America and Vogel (1987) and Akard
(1992) on U.S. politics.
Many scholars studying OECD member countries have focused on
pressures created by globalization, which give rise to another set of
alternative explanations. Some argue that increased international capital
mobility augments structural power and forces countries to reduce corFAIRFIELD: BUSINESS POWER AND TAX REFORM 43
porate tax rates in order to attract and retain investment (see Rodrik
1997; Williams and Collins 1997; Appel 2006; Swank 2006, among many
others).6 Similarly, growing international pressure from the United States
and the Organization for Economic Cooperation and Development to
loosen banking secrecy, due to concern over money laundering in connection with terrorism and large-scale tax avoidance (Sharman 2006;
OECD 2007), might facilitate tax agency access to bank information in
the post-9/11 era.
Both Chile and Argentina sought to attract investment in a context
of high capital mobility in the 1990s.7 Likewise, pressures to soften
banking secrecy affected both countries after 2001. Yet these factors are
not sufficient to explain the different outcomes. Business’s instrumental
power must be analyzed, along with international pressures and structural power. Moreover, although capital mobility can be a key component of structural power, it does not always give rise to a credible disinvestment threat. Capitalists will relocate only if a reform significantly
reduces profits relative to alternative investment options. Taxes are one
of many policies affecting profits, and favorable policies in other areas
may offset the costs of higher taxation (Hacker and Pierson 2002, 282;
Gelleny and McCoy 2001, 510).
Several other plausible explanations for Argentina’s greater progress
in the policy areas examined prove unconvincing on close scrutiny. One
such argument is that governments in Argentina pushed harder for corporate tax increases, given more urgent revenue needs during the convertibility era in the 1990s or after the 2001 crisis. Dire fiscal need can
make policymakers less responsive to business lobbying. But governments in Chile also were intent on raising revenue despite the context
of greater fiscal stability. The administration of Ricardo Lagos
(2000–2005) waged several long and politically draining battles to
increase tax revenue.
A second possibility is that a more liberal legal tradition or a
stronger rule of law accounts for Chile’s lack of progress on bank information access compared to Argentina. However, banking secrecy laws
in both countries greatly restricted tax agency access to all types of bank
information in the 1970s and 1980s.8 Furthermore, expanding access to
bank information in Argentina did not entail violation of the rule of law
or arbitrary action on the part of the state. Instead, governments legislated reforms with congressional approval in the 1980s and early 1990s,
which paved the way for full information access.9
A third explanation focuses on perceptions of the state’s ability to
enforce tax laws. One could hypothesize that business would be less
concerned with policy outcomes in Argentina because evasion is
viewed as a more feasible option than in Chile, where taxpayers believe
that the tax agency is much more effective (Bergman 2009). However,
evidence from interviews conducted for this study indicates that large
firms do care about statutory tax laws, even where tax administration is
viewed as weak in aggregate terms. Large businesses are closely monitored, even in countries where the tax agency lacks the capacity to
detect evasion in the private sector more broadly, because large corporate taxpayers account for a large proportion of total tax revenue. In
addition, business anticipates that tax legislation may be effectively
enforced in the future, if not immediately, and battles are often more
effectively waged over policy changes than over implementation of
existing laws. Furthermore, large firms prefer to lower their tax burden
through tax avoidance, which entails use of legal loopholes, rather than
evasion, which is illegal. Reforms that close loopholes therefore directly
affect their tax burden.
Business preferences do vary across countries and over time, and
these differences contribute to the observed tax outcomes. Opposition
to lifting banking secrecy was more widespread in Chile compared to
postcrisis Argentina. And taxation incited more intense opposition in
Chile, although business also invested significant resources to oppose
tax increases in Argentina. However, policy outcomes cannot be
reduced to preferences alone; business must have sources of power
through which to exercise influence.
Many Latin American countries enacted extensive market-oriented tax
reforms during structural adjustment, from the late 1970s through the
early 1990s. These “first generation” reforms established the efficient but
regressive value added tax (VAT) as the main revenue-raising engine. In
Chile and Argentina, VAT revenue reached European Union averages by
the mid-1990s: 7 to 8 percent of GDP (ECTCU 2006). Total taxation, however, remained low, not only compared to developed countries but also
controlling for level of development. There is a well-known positive
empirical relationship between per capita GDP and tax revenue; Latin
American countries fall well below the world regression line (table 2).
Latin America’s revenue shortfalls are due primarily to undertaxation
of income and profits. On average, direct tax revenue in the 1990s fell
below predictions by 3.4 percentage points of GDP (table 2). Chile and
Argentina’s direct tax shortfalls both exceeded 5 percent GDP. In contrast, revenue from the VAT and other consumption taxes in Chile surpassed predictions by 2.9 percentage points of GDP. While indirect tax
revenue in Argentina fell below the prediction based on GDP per capita,
revenue actually surpassed predictions based on GDP per capita at purchasing power parity by 1 percentage point of GDP (Mahon 2009).10
Continued revenue needs after market reforms made tax reform a
salient issue throughout Latin America. Revenue needs, along with equity
concerns, often motivated governments to consider “second-generation”
reforms to increase taxation of income and profits. These reforms
included increasing corporate taxation and expanding tax agency access
to bank information.
Corporate Taxation
Capital ownership is highly concentrated in Latin America. In practice,
corporate taxes may be passed on to labor or consumers through wages
and prices, but capital owners bear a substantial portion of the burden
(Piketty and Saez 2006).
In Chile, increasing the corporate tax is especially important for raising revenue and improving equity. Chile’s income tax is integrated: the
corporate tax (CT) is essentially a withholding on the personal income
tax (PIT) on distributed profits. Profits reinvested in the firm pay only
the 17 percent CT. But dividends enter the recipient’s PIT base and are
taxed at much higher rates—up to 40 percent. The CT already collected
at the firm level is credited against the recipient’s PIT when dividends
are distributed, so that profits are not “double-taxed.” Because the CT is
so much lower than the PIT, capital owners reinvest most of their profits in the firm—at least on paper. In practice, loopholes allow capital
owners to consume profits without formally withdrawing dividends, and
hence without paying the corresponding PIT. Likewise, independent
professionals form “investment companies,” transforming income that
would otherwise pay the PIT into corporate income taxed at 17 percent.
Underreporting of distributed profits is also very high (Jorrat 2005).
Effective income tax rates paid by the wealthiest Chileans are therefore
very low (table 3).11
Not only do the very rich pay low income taxes, but the tax base
they control is significant. The top 1 percent of taxpayers accounts for
Table 2. Differences Between Actual and Predicted Tax Revenue,
1990s (percent of GDP)
Latin America Chile Argentina
Total tax revenue –4.4 –3.6 –12.3
Consumption taxes –0.3 +2.9 –3.4
Direct taxes –3.4 –6.4 –5.6
Personal income tax –2.7 –4.0 –4.4
Corporate taxes –0.7 –2.4 –1.2
Source: Perry et al. 2006, 96. Predictions from regressions based on per capita GDP.
37 percent of all profits and income reported to the tax agency, but it
pays an average effective income tax rate of only 12 percent; the top 0.1
percent pays only 13 percent. By comparison, in the United States, the
top 0.1 percent pays an average effective rate of 29 percent in federal
income tax alone (Piketty and Saez 2006, 51). Because increasing the
corporate tax is the most practical way to tap this undertaxed and highly
concentrated wealth, it may be the most important reform for improving tax capacity and tax equity in Chile.
In Argentina, in contrast, corporate profits are taxed at the top personal income tax rate (35 percent) and collected from the firm; dividends are exempt from the personal income tax. Comparable income
and tax incidence data are not yet available. However, capital income is
also very concentrated. In 2004, the top 0.01 percent of adults received
approximately 17 percent of all declared capital income.12
Tax Agency Access to Bank Information
Fighting evasion is critical for tapping Latin America’s highly concentrated income tax bases, especially where top marginal personal income
tax rates are already comparatively high, as in Chile (40 percent) and
Argentina (35 percent).13 Income tax evasion is a major problem, even
in countries with more advanced tax agencies like Chile and Argentina.
In both countries, income tax evasion is on the order of 40 to 50 percent (Alvaredo 2007, 15; Jorratt 2005).
Personal income taxes in most of Latin America affect only the top
10 to 15 percent of adults. Within this elite, only the wealthiest can
evade taxes. In Chile and Argentina, income taxes are automatically
deducted from workers’ wages, whereas wealthier individuals with
nonwage income must file tax returns, and therefore have opportunities
to underdeclare assets. In Chile, only 5 percent of adults receive income
from nonwage sources; in Argentina, fewer than 3 percent of adults file
Table 3. Reported Income and Profits and Effective Average Tax Rates,
Chile 2003 (percent)
Cumulative Percentile Share of Total Ratio of Profits Average
(Adults over 20) Income and Profits to Other Income Tax Rate
Top 10 80.7 0.4 6.8
Top 5 64.2 0.6 8.3
Top 1 36.9 1.2 11.9
Top 0.1 17.0 4.0 13.1
Top 0.06 13.7 5.4 12.5
Source: Author’s calculations using a database compiled by Jorratt.
tax returns. Yet because income is so concentrated, the revenue these
taxpayers contribute is significant. In Argentina, revenue from income
tax filers amounted to fully 1 percent of GDP in 2004.14
Tax agency access to bank information is crucial for detecting and
deterring evasion (OECD 2000, 20). Information access allows tax agencies to detect undeclared assets by cross-checking tax returns against
bank records. Requiring banks routinely to provide information on their
customers’ accounts and transactions is particularly useful in this regard.
In addition, access to bank information discourages taxpayers from
underdeclaring their assets by increasing the perceived risk of being
caught (Etcheberry 2005; Bergman 2009).Where laws prevent bank
information access, taxpayers can effectively hide large sums of money
from the tax agency.
Laws vary worldwide in terms of the types of information available
to tax agencies and the conditions of access. In some countries, information is available only on a case-by-case basis; in others, banks provide data on all accounts meeting specified criteria. In 2000, 19 OECD
countries required automatic reporting by banks for at least some types
of information; 5 maintained centralized databases accessible to the tax
agency; and 10 imposed no access limitations (OECD 2000, 36). A
number of OECD and developing countries retain strict banking secrecy
laws, but the worldwide trend is toward expanded access (OECD 2007).
Corporate tax reform after 1991 was more significant in Argentina than
in Chile. After first-generation reforms and stabilization (1989–91),
Argentina’s corporate tax rate increased from 20 percent to 35 percent,
the highest in the region; additional reforms closed corporate tax loopholes. Chile’s new center-left government increased the corporate tax
from 10 percent to 15 percent in the context of the 1990 democratic
transition, but progress thereafter was marginal. Chile’s rate remained
the region’s lowest in 2005 at 17 percent.15 Meanwhile, loophole-closing
reforms focused on indirect rather than direct taxes.
These policy differences contributed to distinct revenue outcomes.16
Corporate tax collections held essentially constant in Chile at an average of 2.4 percent GDP, but Argentine collections grew from 1.2 percent
GDP in 1992 to 3.7 percent GDP in 2005. Argentina’s corporate tax revenue caught up to Chile’s by 1999 and surpassed Chile’s corporate tax
revenue after recovering from the 2001 crisis (figure 1). Much stronger
instrumental power at the cross-sectoral level in Chile compared to
Argentina explains these divergent policy outcomes.
Chile: Strong Instrumental Power Hinders Reform
Top leaders in the Lagos administration believed that tax revenue in
general and corporate taxation in particular were too low. Lagos and his
former finance minister, Nicolás Eyzaguirre, later lamented in interviews
with the author that prevailing revenue levels could not support sufficient social spending and poverty alleviation programs (Lagos 2006,
Eyzaguirre 2007). Eyzaguirre emphasized Chile’s low direct taxes and
asserted that the corporate tax should be much higher. Legislators from
the governing Concertación coalition, including Socialists and more conservative Christian Democrats, also agreed that the corporate tax was
too low (Eyzaguirre 2007; Lorenzini et al. 2006, 28). The administration,
however, increased the corporate tax from 15 percent to only 17 percent, still short of the Concertación’s modest original target of 20 percent for the 1990 reform.
Contrary to common perceptions, this marginal progress cannot be
attributed to structural power. According to the former finance minister,
“The argument that you favor investment if the personal tax rate is way
above the corporate tax rate is fallacious” (Eyzaguirre 2007). In his
analysis, instead of promoting investment in productive assets, the low
corporate tax merely facilitates tax avoidance. Eyzaguirre viewed business complaints that increasing corporate taxation—either by raising the
tax rate or by closing loopholes—would discourage investment as noncredible threats.
Figure 1. Corporate Tax Revenue (percent of GDP)
Notes: Chilean data constructed with help from Michael Jorratt. The Chilean series
ends in 2004 because in 2005, booming copper prices exogenously increased corporate tax revenue. The Argentine series includes corporate income tax, corporate assets
tax, and tax on corporations’ interest payments (applied from 1999 to 2001).
Sources: DNIAF, SII.
They were trying to argue that the economy was going to stop, that
investment was going to stall, that . . . small and medium enterprises were going to collapse . . . my team was a very serious team,
in terms of knowledge of sound economic theory—the arguments
were nonsense. (Eyzaguirre 2007)
Instead, business’s strong instrumental power created political
obstacles to reform that kept all but marginal corporate tax increases off
the agenda, even in the absence of structural power. Strong instrumental power in Chile arose from three main sources: cross-sectoral cohesion, partisan linkages, and informally institutionalized governmentbusiness concertation.
Business Cohesion
Organization and shared ideology produced cross-sectoral cohesion in
Chile, which helped business coordinate opposition to tax increases.
Chile has a strong, prestigious, economywide business association, the
Confederación de Producción y Comercio (CPC), founded in 1933. Its
directorate comprises the presidents of each of Chile’s six sectoral peak
associations. The CPC helped forge consensus across sectors and coordinated lobbying on issues of common concern. Although the CPC’s
importance relative to the sectoral peak associations, which have substantial resources and membership, has varied over time and across
issues (Schneider 2004, 169), the CPC has been a key interlocutor
between government and business since the democratic transition and
is highly active on tax issues.
Business in Chile universally embraces neoliberalism and champions the small-state, low-tax model implemented by the dictatorship of
Augusto Pinochet (1973–1990). In the words of a former CPC president,
“business’s principle is that we do not want the state to grow” (Ariztía
2005). Business often framed taxation as approximating confiscation of
property (Silva 1996, 232; CPC 2000). Partly for this reason, even tax
increases that exclusively affected a single sector often stimulated opposition from business as a whole, as occurred with a tax on copper
mining legislated in 2005. This dynamic dates back to conflict over
redistributive initiatives in the 1960s and 1970s, which motivated business to band together in defense of common interests (Schneider 2004,
162–63; Silva 1996).
Partisan Linkages
Partisan linkages are a critical source of instrumental power in Chile.
Business is a core constituency for the two right parties, Renovación
Nacional (RN) and especially the Unión Democrática Independiente
(UDI).17 Both parties advocate neoliberal economic policies and oppose
taxation, in accord with business preferences. The UDI in particular
reaps electoral support from upper- and middle-class voters with conservative policy positions including opposition to taxation (Luna 2006).
In addition, UDI and the dominant business groups that emerged after
economic restructuring in the 1980s shared close informal ties based on
common origins in the dictatorship. Technocrats in Pinochet’s government who later became UDI members or sympathizers often served on
the boards of business groups that benefited from privatization (Silva
1996; Schamis 1999, 250; Pollack 1999, 45; Etchemendy 2004, 333).
Following democratization, business intervened in right-wing party
politics, frequently imposing its preferred candidates (Pollack 1999, 169,
178). CPC leaders publicly endorsed right presidential candidates,
including Pinochet’s finance minister in 1990 and UDI politician Joaquín
Lavin in 1999 (La Tercera 2000). Although it is difficult to trace party
financing, evidence suggests that big business disproportionately funds
the right, particularly the UDI (Pollack 1999, 132–33; Angell and Pollack
2000, 364; Luna 2006, 305, forthcoming).
The right was a powerful business ally thanks to its strength in the
senate. Authoritarian enclaves gave the right veto power after the transition; Pinochet appointed nine “institutional” senators. This veto power
eroded after 1998 when the terms of Pinochet’s designated senators
ended and the government appointed two of the replacements, as stipulated in the constitution. From 1999 to 2005, the right and center-left
were nearly tied in the senate; four swing voters among the new institutional senators determined which side prevailed. These senators,
named by the Supreme Court and the armed forces, held more moderate views on economic issues (Zaldívar 2007). Winning their votes on
corporate taxation, however, was not easy. Right party and institutional
senator opposition discouraged the Lagos administration from attempting anything but marginal corporate tax reform. Lagos (2006) and Eyzaguirre (2007) asserted that they had lacked the votes necessary to
advance further on this front.
Government-Business Concertation
Concertation with business, in the form of regular government consultation and collaboration with the CPC and sectoral business associations,
provides a third source of instrumental power. Concertation is important
not simply because easy access to policymakers allowed business to
communicate its interests and to lobby for concessions, but because this
informally institutionalized pattern of government-business relations
created incentives for policymakers to avoid conflict with business over
During the transition, the Concertación government cultivated business confidence by consulting with peak associations on economic
reforms, a practice initiated by Pinochet in the 1980s (Silva 1996; Schneider 2004). Concertación leaders felt these measures were critical to
ensure investment and growth during a time of uncertainty, given that
business openly supported Pinochet throughout the transition. Credible
threats of disinvestment or a coup backed by business subsided after
consolidation of neoliberalism and democracy. However, consultation
on all facets of economic policy and economic governance remained a
defining characteristic of government-business relations, even in the
absence of the conditions that originally led the coalition to embrace
this model.
Concertation created incentives for government policymakers to
avoid conflict with business. Collaboration with business in a wide
range of policy areas beyond taxation was valued partly because of
excellent macroeconomic outcomes associated with this model (Schneider 2004, 210). For example, government-business collaboration led to
a series of capital market reforms championed by the Lagos and
Bachelet administrations (2005–2009). The reforms were based on proposals made by the Sociedad de Fomento Fabril (SOFOFA), the industrial association.
Furthermore, business support and collaboration on issues like
macroeconomic policy could be politically important for Concertación
finance ministers, all of whom adhered to orthodox economic principles. Finance ministers occasionally experienced significant pressure
from the Concertación’s left wing to deviate from the neoliberal economic model more than they felt prudent, as occurred during the
2000–2001 recession. Collaboration with business allowed the finance
minister to counterbalance pressures from within the Concertación.
I did have a lot of opposition, because the ones ask[ing] for more
state involvement were very vocal. . . . The new generation of business leaders saw that Lagos and I were macroeconomically responsible, that [we] would defy the ones within our sector that wanted
to be more Keynesian, and that at the end of the day when it comes
to taxes we were sensible. . . . In economic policy at the end [there]
was a big coalition of the center, and the very ideological in both
extremes were isolated. From the political point of view that was a
very important step. (Eyzaguirre 2007)
Given the value of collaboration with business, conflict over taxes
could be costly for the government. Taxes threaten business’s core interests, and business correctly perceives taxation as a tool for redistribution. As Eyzaguirre (2007) observed, “The big entrepreneurs understand
that once we have agreed on a market economy . . . taxation is the
name of the war.” Conflict over taxes could jeopardize business support
during critical periods or disrupt productive government-business interactions on other issues.
Restricting the Agenda
Instrumental power restricted the tax reform agenda in Chile. The
Finance Ministry anticipated that tax increases would stimulate costly,
coordinated opposition from business and the right; concertation with
business associations created additional disincentives for attempting
significant reform.
The 2000 anti-evasion reform illustrates the mechanisms of business
influence. Although Eyzaguirre observed that “the big money is in direct
taxes” (2007), the reform was designed to raise revenue primarily by
fighting evasion of indirect taxes, so as to minimize conflict with business and the right. These actors were especially disinclined to accept tax
increases in 2000, given their hostility toward the first Socialist government since the 1973 coup and the right’s belligerence following its candidate’s strong performance in the 1999 presidential election (Silva 2000).
Although the reform proposed only marginal tax increases associated with closing loopholes, business and the right aggressively opposed
the legislation. Cross-sectoral cohesion and partisan linkages allowed
business and the right to consolidate into a single actor. The right often
took instruction directly from business (Eyzaguirre 2007), and coordinated lobbying strengthened their bargaining position. Former tax
agency director Etcheberry, who helped negotiate the reform, explained,
The right and the business leaders . . . it was the same thing. . . . I
didn’t know if I should negotiate with the senator leader of the oposition or with the president of the big enterprises. Sometimes I had
to negotiate with both, because they work together. . . . Sometimes
they were both in the same meetings saying the same things.
(Etcheberry 2005)18
Although the Lagos administration secured its primary objectives,
passing the reform required a major expenditure of political capital
(Etcheberry 2005; Lagos 2006; Eyzaguirre 2007); the reform languished
in Congress for almost a year while the executive negotiated concessions with business and the right. This experience discouraged Lagos
from proposing more significant tax initiatives later in his term. As he
When you are in government, what is important is to deliver. You
have to count your chips, how many you have to fight. If I get
involved in doing a profound tax reform, I lose two, three years
arguing about the tax system, and there is no AUGE [health care
reform], no education [reform], nothing. (Lagos 2006)
The emphasis here on influence over the reform agenda contrasts
with earlier work by Silva (1996, 230, 1998, 38), who focused on business’s ability to win concessions to reform proposals based on easy
access to executive policymakers. This study found instead that influence after a proposal had been drafted tended to be insignificant compared to influence over the agenda, an earlier and more critical stage in
the policy process.
Consider another example: the 2001 corporate tax reform. Eyzaguirre believed that the corporate tax rate should be increased “notoriously” [sic], presumably to between 20 percent, the Concertación’s goal
in 1990, and 30 percent, the Latin American average (2007). However,
the proposal entailed increasing the rate to only 18 percent and compensating business and the right by lowering the top personal income
tax rate; the reform was revenue-neutral. During negotiations before
debate in Congress, business and the right managed to reduce the proposed corporate tax rate to 17 percent. But that concession was insignificant compared to their ability to prevent much more significant reforms
from even being discussed.
Instrumental power thus shifted the range of tax rates under debate
toward business preferences (figure 2), removing important reforms from
the agenda that the government might otherwise have sought to enact.
This analysis agrees with Hacker and Pierson’s observation (2002, 284)
that “the most significant aspect of influence involves moving the decisionmaking agenda toward an actor’s preferred end of the spectrum.”
The 1990 Reform in Retrospect
The foregoing discussion validates Boylan’s (1996) emphasis on the
1990 tax reform’s limitations, which contrasts with Weyland’s (1997)
interpretation of the reform as a progressive taxation success story. In
retrospect, the 1990 corporate tax increase is best understood as a limited, one-time business-right concession during an unusual conjuncture—the transition to democracy. Following Pinochet’s defeat, key
business leaders thought that compromise with the new government
was strategically opportune. A moderate tax increase to fund social
spending would help legitimate neoliberalism, which was popularly
viewed as benefiting only the rich (Bartell 1992; Boylan 1996; Weyland
1997). Similarly, RN leaders strategized that accepting the reform would
enhance their electoral prospects by building RN’s reputation as a
nonobstructionist, centrist party (Boylan 1996; Pollack 1999). Before
accepting the reform, however, business and the right secured conces54 LATIN AMERICAN POLITICS AND SOCIETY 52: 2
sions that reduced progressivity and lowered the revenue target from 3
percent to 2 percent of GDP: the corporate tax increased to 15 percent
rather than 20 percent, and a regressive two-point VAT increase was
added to the package. Moreover, the factors that encouraged business
to accept the tax increase were unique to the transition period. By the
mid-1990s, the economic model was consolidated; business opposed
further tax increases, and the more intransigent UDI gained seats in
Congress at RN’s expense. Although business cohesion may have facilitated negotiation of the 1990 reform, as Weyland argues, cohesion
helped business block all but minor tax increases thereafter.
Argentina: Weak Instrumental Power Facilitates Reform
Weak instrumental power at the cross-sectoral level, in the absence of
significant structural power, gave Argentine governments much more
leeway to tax corporations.
Structural power rarely restricted the corporate tax agenda. Policymakers from the second administration of Carlos Menem (1996–99)
expressed little concern that the moderate corporate tax increases they
pursued would discourage investment. Despite high capital mobility,
these tax increases were not expected to set off a flight reaction, given
that policies in many other areas greatly benefited investors. In the
words of former economy minister Roque Fernández (2006): “we were
completely friendly toward national and foreign capital. . . . At that time,
everyone wanted to invest and take risks in Argentina. So we said to
them: good, then pay income tax.” Only in 1999, during Fernando de la
Rúa’s administration (1999–2001), did the executive avoid corporate tax
increases for fear of negative economic consequences, given the context of recession and pressures on domestic firms associated with the
overvalued exchange rate, as the former economy minister explained
Figure 2. Corporate Tax Policy Space, Chile (Tax Rates)
15 17 18 20 30
Status Quo: 2002–2009
fPp Latin American
Status Quo:
Finance Minister’s
Ideal Range
(Machinea 2007). After the 2001 crisis, governments avoided raising tax
rates to promote investor confidence, but they viewed closing corporate
tax loopholes as unproblematic (Miceli 2008). For example, the administration of Néstor Kirchner (2003–7) legislated stricter transfer price regulations to control tax avoidance involving transactions with subsidiaries
in tax havens. Exporters protested that the reform would destroy futures
markets and undermine growth and investment in the grain sector, but
the economy minister, Roberto Lavagna, and the tax agency director,
Alberto Abad, later asserted that on the basis of their own technical
assessments, they had always been confident that the reform would
have no negative effects (Lavagna 2006; Abad 2008).
Most important, instrumental power at the cross-sectoral level was
much weaker in Argentina than in Chile. First, Argentina has no electorally significant traditional right party (Gibson 1996). Legislators across
party lines thought the tax system should be more progressive. Taxing
big business and multinational corporations was especially popular. For
example, reforms under both Peronist and Radical Party administrations
that strengthened transfer price regulations were welcomed by the governing coalition and the opposition alike. In contrast to Chile, therefore,
big business had no reliable partisan ally. Lobbying in Congress tended
to succeed primarily when a convincing case could be made that the
proposed reform would negatively affect small and medium-sized businesses, as opposed to big business or multinational firms.
Second, business also lacked cohesion. Argentina has no permanent
economywide peak association, and sectoral divisions are pronounced.
Sectoral associations struggle to forge common positions among their
own members and lack capacity to build broader alliances (Acuña 1998;
Schneider 2004). Furthermore, business lacks a strong common ideology that could facilitate coordination against tax increases; the private
sector does not espouse neoliberalism as uniformly as in Chile. While
all business groups tended to oppose corporate tax increases, lack of
coordination and divergent interests on other issues created opportunities for the government to divide and conquer. The executive could buy
acquiescence from key sectors with concessions in other policy areas or
simply ignore demands from sectors viewed as less politically or economically important.19
Third, executive-business relations varied across sectors and did not
create instrumental power at the cross-sectoral level. Governments consulted with capitalists of their own choosing on an ad hoc basis (Schneider 2004, 193). In the 1990s, some firms and sectors, especially finance,
were recruited into government; given business fragmentation, however, they tended to lobby primarily on sectoral interests rather than
cross-sectoral issues (Viguera 2000, 189). The financial sector and others
that benefited from privatization and liberalization in the 1990s tended
to tolerate corporate tax increases in the context of an economic model
that greatly favored their interests.
The 1998 tax reform illustrates these dynamics. The major sectoral
peak associations opposed the assets tax, the tax on interest payments,
and the corporate tax rate increase proposed in the reform. Early on, the
Group of Eight, an informal group composed of presidents from each
of the peak associations, met to coordinate a united cross-sectoral
lobby. However, the government exploited divisions on nontax issues
by offering sector-specific benefits, and the Group of Eight’s efforts collapsed (Gall 1998; Bonelli 1998a, b, c). The construction association
withdrew after the government announced it would halt a highway
project that the sector opposed. Businesses with large labor costs were
given a special incentive to accept the new taxes: the revenue generated would finance an eventual reduction of employers’ social security
contributions. Meanwhile, the financial sector responded to government
pressure to refrain from public criticism of the reform, given its support
for the government’s other economic policies.
In the absence of coordination, the sectoral associations’ efforts to
oppose the reform had little effect. Meetings with Economy Ministry officials yielded no concessions. Government technocrats ignored the complaints of the organizationally weak Unión Industrial Argentina (UIA), the
industrial association. Former treasury secretary Pablo Guidotti dismissed
these concerns as the worries of groups within the UIA representing economically weak, noncompetitive, inward-oriented industries (2006). The
Economy Ministry also ignored the organizationally stronger Sociedad
Rural Argentina (SRA), an agricultural association, which decried the
assets tax. Guidotti later asserted that both associations’ demands
reflected narrow and illegitimate sectoral interests (2006).
After this stage of lobbying failed, the UIA, SRA, and other associations presented very similar negative assessments of the new taxes to
the congressional Finance and Budget Committee (CPH 1998). However, legislators mostly ignored the business associations as well, except
for agreeing to increase the exemption level for the assets tax and to
place a cap on the interest tax in response to the UIA’s argument that
these taxes would hurt small business.
Tax agencies in both Argentina and Chile sought access to bank information to fight income tax evasion. Although both countries made some
progress in the 1990s, business in Argentina opposed access to time
deposits (plazo fijos, akin to certificates of deposit), and business in
Chile rejected access to checking accounts. These types of information
were most relevant for reducing evasion in the respective countries,
given different bank deposit structures and dominant forms of evasion
(AFIP 2006a; Jorratt 2007).
Time deposits remained off-limits in Argentina during the 1990s, but
the tax agency obtained access in 2006. In contrast, access to checking
accounts remained off the agenda in Chile until 2009, when the government proposed very limited reform. The Chilean tax agency could
obtain checking account information only with judicial authorization
and only in cases where fraud had already been detected. The tax
agency therefore could not use deposit information to screen tax returns
for undeclared assets. In Argentina, in contrast, banks now routinely
provide all information on deposits and transactions that the tax agency
deems relevant for controlling evasion.
Argentina in the 1990s: Structural and Instrumental
Power Preclude Reform
In the 1990s, structural power prevented access to time deposit information in Argentina. A widespread perception prevailed that tax agency
oversight would make depositors withdraw their savings from the
banks. In addition, the financial sector, which would have suffered
directly from that outcome, enjoyed significant instrumental power.
Financial sector lobbying reinforced policymakers’ concerns about the
consequences of expanding bank information access and therefore
helped to keep reform off the agenda.
Structural Power
High mobility and potential incentives to relocate savings created a
credible disinvestment threat. Financial assets are always quite mobile;
funds can be transferred electronically worldwide. But in Argentina, savings were also physically mobile. Financial centers in Uruguay are
located close to Argentina’s capital, making it especially easy for Argentines to move financial assets abroad.
In addition, the financial sector and policymakers were genuinely
concerned that giving the tax agency access to time deposits would scare
investors away from the banks. Informants from both the public and private sectors expressed the view that memories of economic instability
made Argentines very sensitive to any changes in banking conditions. For
example, a financial sector informant explained that Argentina’s history of
hyperinflation, economic crises, and bank failures that destroyed savings,
as well as state interventions that froze and effectively confiscated bank
deposits in 1989, “generated a terrible sensation of uncertainty. And that
sensation remains, that the banks are not so secure” (Wilson 2008). Sim58 LATIN AMERICAN POLITICS AND SOCIETY 52: 2
ilarly, former economy minister Felisa Miceli (2008) spoke of a “generalized psychosis produced by collective memories” of financial crises.
Strict banking secrecy rules in Uruguay created additional incentives
to relocate savings in response to reform. Information about deposits and
other financial operations in Uruguay was not accessible to the Argentine tax agency. Wealthy Argentines regularly evaded taxes by registering
assets to corporations constituted in Uruguay, and tax agency informants
commonly called Uruguay a “tax haven” (AFIP 2006a, b). A tax agency
informant summarized the rationale against reform as follows:
If you put in place this informational regime, the only thing you’re
doing is forcing transfers to Uruguay, and you don’t know anything
about deposits in Uruguay. So business gets done in Uruguay, and
Argentina loses capitalization and investment, all because of AFIP
[the tax agency]. That was the argument—that we were going to
scare away deposits. (AFIP 2006a)
The disinvestment threat gave rise to strong structural power
because of the significant potential impact on the financial sector and
the economy more broadly. Time deposits represented a large fraction
of total deposits by value—an average of 70 percent from 1995 to 2000
(BCRA)—so massive withdrawals would have devastated the banks. The
financial sector, moreover, played a key role under the convertibility
regime, which stabilized the currency and spurred high growth rates.
Large quantities of foreign capital, in the form of portfolio and direct
investment, were critical for sustaining the economy. Much of the
money entering the country was invested in the financial sector, which
channeled funds to the productive sector, as well as the public sector.
Because of the financial sector’s economic importance, large-scale time
deposit withdrawals could have had macroeconomic consequences.
The Financial Sector’s Instrumental Power
The perceived threat of reduced investment motivated the banks to
reject reform. Unlike corporate taxation, tax agency access to bank
information was a core interest for the banks; they feared that they
would lose depositors, which would have had a much greater impact
on their profitability and viability than higher corporate taxes. The financial sector had sufficient instrumental power on its own to influence
policy in this area, even though other sectors did not have strong preferences on this issue.
The financial sector’s instrumental power arose from recruitment
into government. Financial sector leaders occupied important ministerial
positions during the 1990s; for example, the secretary of finance during
Menem’s first administration had been the president of the banking
association, and economists from think tanks with close ties to the financial sector were appointed to the Ministry of Economy and the Central
Bank (Heredia 2004; Página 12 2002). Recruitment into government
was partly a reflection of the financial sector’s important role in the economic model promoted during the 1990s. Since government and financial sector interests coincided, it was natural for the executive branch to
grant the banking association privileged access and to take seriously its
concerns. As Menem’s former secretary of the treasury remarked, “the
banks were a central voice” (Guidotti 2006).
Instrumental power allowed the financial sector to influence policy
on many fronts, including social security reform, Central Bank reform,
strengthening capital markets, and other aspects of financial sector
reform. As a longtime official of the banking association (ADEBA)
recalled, “The process of modernization was accompanied by the banks.
In reality, we were very much listened to, not only on tax issues”
(Ehbrecht 2006). Similarly, Heredia (2003, 100) observes that “during the
1990s, the financial sector established itself as . . . one of the most powerful pressure groups.”
Instrumental power helped keep access to time deposits off the
agenda despite the tax agency’s repeated requests. Thanks to recruitment
into government, the financial sector had ample opportunity to reinforce
concerns in the executive branch that tax agency access to time deposits
would reduce investment in financial instruments. On the one occasion
when structural power failed to keep the issue off the agenda, instrumental power helped the banks block reform. In 1995, during the onset
of the Tequila Crisis, provoked by devaluation of the Mexican peso, the
tax agency issued a resolution requiring the banks to provide time
deposit information. The banks lobbied the executive intensively (Lippi
1995), arguing that the resolution exacerbated incentives for investors to
withdraw their deposits at a sensitive moment: “The sensation that a
crisis was possible had not yet arrived . . . until the tax agency
announced that it would put in place an informational regime on time
deposits . . . the first reaction was that everyone wanted to take their time
deposits out of the banks” (Ehbrecht 2006). After meeting with the secretary of finance—the former ADEBA president—the economy minister
retracted the resolution the day after it was issued (Clarín 1995).
Argentina, Post-2001: Weak Structural and Instrumental
Power Facilitate Reform
Both structural power and instrumental power declined after 2001,
making possible tax agency access to time deposits. The 2001 economic
crisis and increasing oversight of the financial system in response to
international pressures drove these changes.
Argentina’s 2001 economic crisis undermined structural power by
reducing the vulnerability of the economy and the financial sector to any
potential disinvestment that the reform might have provoked. From a
macroeconomic perspective, the financial sector played a much less
important role in the economy after the crisis and the demise of convertibility. The massive run on the banks leading up to the crisis and the
freezing and subsequent devaluation of deposits that remained in the
banks drastically reduced the relative size of the sector. Deposits in public
and private banks as a percent of GDP fell from 28 percent in 2000 to an
average of only 19 percent from 2003 to 2006 (BCRA). While governments
sought to strengthen the financial sector, maintaining a high value of
deposits was much less critical for stability in the post-convertibility era.
From the financial sector’s perspective, furthermore, time deposits
were less important. After the crisis, the value of funds in time deposits
relative to other accounts declined significantly, partly because much
lower interest rates made time deposits less attractive investment instruments, and partly because customers preferred ordinary savings
accounts with unrestricted access, given their loss of confidence in the
banking system. Time deposits as a percent of the total value of deposits
in private banks dropped from an average of 70 percent from 1996 to
2000 to only 45 percent from 2003 to 2006 (BCRA). Additional time
deposit disinvestment would therefore have had a much smaller impact
not only on the economy as whole, but also on the banks, compared to
the precrisis era.
In addition, widespread adoption of anti–money-laundering measures, in response to international pressure following the terrorist attacks
in the United States, reduced the disinvestment threat associated with tax
agency access to time deposits. The banks perceived that their customers
would be much less likely to react negatively if the tax agency obtained
time deposit information in this new context. As an ADEBA informant
asserted, “Today it is not the same as in 1995. People were more sensitive during the Tequila crisis. . . . [Today] people are more and more
aware that if they are going to do a transaction in a bank, it will be monitored,” if not to control tax evasion, then to control money laundering
(Ehbrecht 2006). Accordingly, investors who did not want the tax agency
to have information about their assets would not have deposited significant sums of money in the financial system after 2001. The banks’ clientele was therefore less likely to include people who would have withdrawn deposits in response to expanded information access.
The banks’ instrumental power also declined after the 2001 crisis.
Recruitment into government ended with the demise of convertibility
and the change of economic model. During the Kirchner administration,
there were far fewer connections and much less ideological affinity
between the financial sector and cabinet members. This new state of
affairs was not surprising, given the reduced economic importance of
the financial sector, as well as popular antipathy toward the banks in the
aftermath of the crisis.
Weakened structural and instrumental power allowed the tax
agency to obtain full access to deposit information without difficulty in
2006. Once the threat and the impact of disinvestment declined, structural power no longer hindered reform. Not only were the banks less
opposed to giving the tax agency time deposit information, they were
also in a much weaker position to resist, given their reduced instrumental power. The tax agency’s involvement in other initiatives, including several major anti-evasion reform packages, explains why it did not
turn to the issue of time deposit information until 2006.
The role of crisis in facilitating bank information access explicated
here differs from other arguments advanced in the literature on economic reform. Weyland (2002), for example, argues that countries are
more likely to adopt reforms in times of severe economic crisis because
policymakers become more inclined to accept the associated risk. That
argument and others that explain reforms implemented during crises do
not apply to the reform at hand, which took place well after Argentina’s
2001 crisis. The tax agency obtained time deposit information not
because policymakers were more willing to risk disinvestment, but
because that risk had significantly declined. The argument developed
here that the 2001 crisis improved prospects for reform by helping to
reduce structural power is similar to Hacker and Pierson’s observation
(2002, 297) that if investment has already declined significantly, further
disinvestment may have little effect.
Chile: Strong Instrumental Power Hinders Reform
Access to checking accounts in Chile remained off the agenda through
2008, despite international pressures to loosen banking secrecy after 2001,
similar to those experienced by Argentina. Although the issue finally
entered the agenda in 2009, proposals for reform were extremely limited.
Structural power does not explain this outcome; bank information
access elicits no credible threat of disinvestment (Etcheberry 2005). First,
checking accounts are much less mobile than savings accounts. Because
checking accounts are regularly accessed, it is much more difficult to
move them offshore. Second, Chile’s banking system, currency, and
economy have been remarkably stable since the late 1980s; the conditions that created incentives for depositors in Argentina to remove funds
from the banks in response to changes in tax agency oversight are
absent in Chile. Moreover, previous experience suggests that Chilean
depositors would not alter their behavior in response to greater tax
agency oversight. When the tax agency obtained access to bank records
on interest earnings in 1995, the only observed response was an
increase in interest earnings declared on tax returns (Etcheberry 2005).
Business’s strong instrumental power and cross-sectoral opposition
to reform explain the tax agency’s limited access to bank information.
In contrast to Argentina, where business leaders outside the financial
sector expressed little concern over the issue, business opposed softening banking secrecy much more broadly in Chile (Ariztía 2005;
Etcheberry 2005; CPC 2000, 6). This opposition apparently stemmed
from reluctance to empower the tax agency to audit individual income
taxes more effectively. Large firms are closely monitored and rarely
evade taxes, so granting the tax agency access to checking accounts
would have little impact on their tax burden. However, business associations in Chile have represented not just the interests of corporations
but also those of individual capital owners. A high-level tax agency
informant explained,
Big business owners do not want the tax agency to look over their
personal checking accounts—not the business’s checking account,
but the personal account. The business associations say they have
nothing to hide: our accounts are open for review. But in a more
concealed manner, they lobby against reforms to open checking
accounts. (SII 2007)
As in the case of corporate tax increases, instrumental power arose
from cohesion, partisan linkages, and government-business concertation, which created incentives to avoid conflict with business. The tax
agency requested access to checking accounts while the 2000 anti-evasion reform was being designed, but the Finance Ministry dismissed the
reform as unfeasible. Tax agency informants interviewed in 2007 were
quite pessimistic about the prospects for reform in the foreseeable
future (SII 2007).
In 2009, international pressure of a new kind helped place access
to checking accounts on the agenda. During the final stages of Chile’s
application process, the OECD made loosening banking secrecy an
explicit requirement for securing membership in the organization.
Whereas previous pressure from the United States and other international actors to loosen banking secrecy laws had had little effect, the
national prestige and benefits associated with OECD membership created political space for reform. The executive proposed reform in April
2009 amid significant controversy, but the government reached an
agreement with right party legislators in August 2009 (Cisternas 2009),
and Congress approved the reform in October 2009.
Given business’s strong instrumental power, however, the reform
proposal was extremely limited in scope. The tax agency would be
required to obtain express consent from the account owner authorizing
the bank to release information; otherwise the case would be sent to the
courts (Cisternas 2009). While the reform represents a step forward, it
gives the tax agency very little additional capability to cross-check tax
declarations against bank records in order to detect evasion.
This article has offered new perspectives on tax outcomes in Chile and
Argentina. Widely cited research on taxation in Chile characterizes the
country as a success story, on the basis of the 1990 corporate tax reform
(Weyland 1997). Yet increasing the still very low corporate tax remains
among the most important reforms needed to improve tax capacity and
tax equity in Chile. Furthermore, inadequate bank information access
handicaps the tax agency’s ability to control income tax evasion.
Argentina has been characterized as a case of persistently weak tax
capacity (Melo 2007; Bergman 2003). Yet corporate tax revenue growth
since 1992, due partly to rate increases and reforms that closed loopholes, demonstrates that Argentina has developed notable extractive
capacity in this tax policy area over time. Argentina’s tax agency also is
now more powerful than its internationally acclaimed Chilean counterpart in the area of bank information access.
Variation in business power explains why only marginal reform was
possible in Chile in these policy areas, whereas Argentina made significant advances. Instrumental power accounts for most of the variation
across the two countries. In Chile, strong instrumental power, arising
from cross-sectoral cohesion, partisan linkages, and executive-business
concertation, removed reforms in both areas from the agenda. In
Argentina, corporate tax reform was more significant, given the much
weaker instrumental power at the cross-sectoral level, due to business
fragmentation and lack of partisan linkages. The financial sector’s instrumental power, based on recruitment into government, helped block
bank information access during the 1990s, but weak instrumental power
after the 2001 financial crisis made reform possible. Structural power
arising from a disinvestment threat also prevented bank information
access during the 1990s, but it, too, declined after 2001, largely due to
the effects of the crisis.
More generally, instrumental power in Chile kept all but marginal
increases off the agenda in all tax policy areas, whereas much weaker
business power in Argentina facilitated greater progress (Fairfield 2010).
Total tax revenue in Argentina increased by almost 8 percent of GDP
from 1995 to 2004, the largest increase in Latin America, while tax revenue in Chile held essentially constant. Some sectors in Argentina
enjoyed sufficient instrumental or structural power to block reforms
with sector-specific impact, but their power in most cases was tempo64 LATIN AMERICAN POLITICS AND SOCIETY 52: 2
rally delimited, as with the financial sector, or emerged only in response
to extreme policy measures, like the 2008 export tax increase, which
provoked cohesive protest from the previously fragmented agricultural
sector (Fairfield 2009).
This research also offers several more general observations about
business power. The analysis highlights the importance of studying business influence on the reform agenda. That influence over the agenda can
be much more important than influence during subsequent stages of policymaking, as illustrated by the case of corporate taxation in Chile.
Focusing on more manifest aspects of business power, such as lobbying
after bills have been drafted, without studying policymakers’ perceptions
and actual preferences may lead to underestimating business influence.
Furthermore, this research has found that instrumental power can
be as important or more important than structural power for setting the
agenda, a possibility that many authors do not explicitly consider (Smith
2000, 115–41; Hacker and Pierson 2002, 279–86; Fuchs 2007, 56–58,
71–95). Instrumental power does not come into play only after the executive has delineated the core features of a reform. Just as policymakers
may rule out reforms because they anticipate reduced investment, they
also may rule out reforms because they anticipate political resistance
from business and business allies. This scenario may be most relevant
in stable political systems where business has strong and fairly constant
sources of instrumental power, such that it is easy for policymakers to
anticipate reactions to reform.
Turning to structural power, careful attention must be paid to policymakers’ perceptions regarding anticipated consequences of reform.
Policymakers’ assessments of whether or not a reform is likely to provoke disinvestment may depend on multiple factors that vary across
countries, over time, and across policy areas. Similar reforms may create
different incentives for investors in different contexts. Capital mobility
alone does not necessarily make a disinvestment threat credible.
Three final issues should be emphasized. First, analyzing business
politics and distinguishing between instrumental and structural power
are critical for understanding tax policy. Second, disaggregating taxation
into distinct policy areas can reveal significant variation in politics and
outcomes that cannot be detected by examining total tax revenue or
composite reform indices. Third, building tax capacity in highly unequal
countries raises issues of redistribution that may instigate major political
battles with economic elites.
I would like to thank three anonymous reviewers of LAPS for extremely
helpful comments, Ruth Berins Collier, David Collier, Kent Eaton, and among
other colleagues, Mauricio Benítez, Taylor Boas, Sebastián Etchemendy, CandeFAIRFIELD: BUSINESS POWER AND TAX REFORM 65
laria Garay, Evelyne Huber, Maiah Jaskoski, Evan Lieberman, Juan Pablo Luna,
James Mahon, Paul Pierson, Emmanuel Saez, Ben Ross Schneider, and Eduardo
Silva, as well as hundreds of informants who shared their time and insights with
me. Fieldwork was supported by Social Science Research Council and FulbrightHays fellowships. This study is part of a larger project on the tax reform agenda
and the fate of revenue-raising proposals across tax policy areas in Latin America after structural adjustment. All translations from Spanish are by the author.
1. Effective corporate tax rates are not available for Latin America.
2. Some authors fall on the instrumental side (Frieden 1991; Schamis
1999), while others tend toward the structural side (Mahon 1996; Maxfield 1997),
but they do not explicitly apply these classic concepts or distinguish between
the two forms of power.
3. European corporatism, which involves tripartite bargaining with strong
labor unions, is distinct from concertation in Latin America, where labor is usually weak or absent.
4. Winters (1996, xv) also notes the importance of policymakers’ perceptions.
5. The financial sector could potentially have blocked corporate tax
increases during the 1990s too, but it did not actively oppose those reforms.
6. Others argue that countries retain leeway to craft tax policy (Swank
1998; Inclán et al. 2001; Gelleny and McCoy 2001, and others). Wibbels and Arce
(2003) find mixed results.
7. Both countries were highly integrated into international markets,
although Chile actually retained more capital controls than Argentina (Morley et
al. 1999).
8. The Pinochet dictatorship established strict banking secrecy laws in
1986, whereas in practice, the tax agency had greater information access in prior
periods (SII 2005).
9. Business power in the 1990s hindered access to bank information
despite the reforms.
10. Author’s calculation based on DNIAF and a regression conducted by
Mahon (2009).
11. The data on which the table is based impute corporate taxes and
retained corporate profits to their owners. This method is appropriate because
few companies are publicly traded, and only 35 percent of profits are distributed annually (Jorratt 2005). Engel et al.’s widely cited incidence study (1999)
excludes retained corporate profits, ignoring the main income tax base and
underestimating concentration of wealth and the redistributive potential of
taxes. Neither Cantallopts et al. (2007), who also use Jorratt’s imputed profits
database, nor Engel et al. examine tax incidence within the top decile.
12. That is, rents, interest, business income, dividends, and capital gains,
excluding reinvested corporate profits. Author’s calculations using AFIP 2005.
13. The Latin American average from 1999 to 2004 was about 29 percent
(Sabaini et al. 2006, 40).
14. Author’s calculations, AFIP 2005. Comparable data are not available for
15. Brazil’s minimum rate is 15 percent, but other corporate taxes apply.
16. Administrative improvements also helped increase revenue in
Argentina (Eaton 2002).
17. See Luna forthcoming for further discussion of the core constituency
relationship between business and the UDI.
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