Download Taxation and Historical Legacies Brazil and Mexico Compared

Taxation and Historical Legacies
Brazil and Mexico Compared
Gabriel Ondetti
Department of Political Science
Missouri State University
[email protected]
Prepared for the ICPA Forum seminar, Public Policy: Brazil in Comparative
Perspective, November 18-19, 2011, Fundação Getúlio Vargas-Escola de Administração de
Empresas de São Paulo, São Paulo, Brazil
Taxation and Historical Legacies:
Brazil and Mexico Compared1
It is often said that Latin America suffers from insufficient taxation, which contributes to
subpar public services and little or no income redistribution. However, the level of taxation
actually varies drastically among the countries of the region, ranging from around 10% of gross
domestic product (GDP) in Guatemala, Mexico and Paraguay to 30% or more in Argentina and
Brazil. The causes of this variation, moreover, have been the subject of little research. This
absence is significant. Whether one supports taxation as a tool for achieving development and
social equity, or criticizes it as a source of inefficiency, it is hard to deny its importance to the
functioning of the state and the character of the political process.
In this paper I explore the especially striking contrast in level of taxation between two of
the region’s largest and most prosperous countries, Brazil and Mexico. Most of the existing
scholarship on taxation implies that Mexico’s taxation level should be at least as high as Brazil’s,
if not higher. Yet, Brazil has an overall tax burden approaching 35% of GDP, while Mexico’s is
only about 11%. Although there are numerous comparative studies of these two countries
(Hewlett and Weinert 1982; Haber 1997) this paper may well be the first to focus specifically on
the contrast in their tax burdens.
Part of the reason for this contrast is the major role played by the state oil company in
supplying non-tax revenue to the Mexican state. In comparison, the Brazilian state has had much
less access to such revenues. In this sense, the paper confirms the expectations of the “rentier
state” literature that extractable natural resource wealth leads to light taxation (Ross 2001).
Nevertheless, even if we examine total revenues, rather than tax revenue alone, the contrast
between the two countries remains stark, since oil only boosts Mexican public revenues to 1820% of GDP (INEGI, various years). In addition, Brazil’s superiority in generating revenues
predates the consolidation of oil as the cornerstone of Mexico’s revenue system in the early
1980s by many decades, going back to the 19th century.
I argue that the difference in tax burdens has less to do with contemporary economic or
institutional structures, the core of existing theories of taxation, than with historical processes
that shaped both elite views of the proper role of the state and the political capacity of popular
sectors to pressure for greater expenditure (thus necessitating higher tax revenues). More
specifically, I emphasize the role of two historical moments in creating cultural and institutional
path dependency effects that shaped the subsequent trajectory of taxation.
The more proximate of these is the initial political incorporation of popular sectors,
which occurred mainly in the 1930s in both countries (Collier and Collier 1991). In Mexico this
process featured crucial socioeconomic and institutional reforms that cemented lasting political
bonds between peasant and worker groups, on the one hand, and the ruling party, on the other.
Brazil’s incorporation process did not involve any reform as politically charged as Mexico’s
agrarian reform or its nationalization of oil, and did not engender strong ties between the popular
sectors and any political organization. Ironically, the weaker incorporation of Brazil’s lower
1
I would like to thank Oscar Cetrangolo, Jorge Martinez-Vazquez and especially Fabício
Augusto de Oliveira for their generous assistance in making sense of official tax data. Any
remaining errors are my responsibility alone.
classes would subsequently give them more leverage to demand social expenditures and state
patronage, which had the effect of pushing up the tax burden.
Though important, the process of popular sector incorporation does not suffice to explain
the gap in taxation between Brazil and Mexico, since that difference long predates the 1930s and
has not been driven purely by popular sector demands for redistribution. In Brazil the public
sector has historically played a far larger role in promoting development (Graham 1982; Topik
1987), which in turn reflects a greater willingness among private sector elites to accept the state
as a protagonist in the economy. In Mexico, by comparison, there is a greater distrust of the state,
evidenced in a stronger liberal current within the business community. As I argue below, the
origins of this difference are traceable to sharply contrasting transitions to independence. Brazil’s
uniquely smooth transformation from colony to independent nation fostered a relatively
benevolent view of the state among elites that would serve as the basis for the construction of a
vast public sector. Mexico, meanwhile, experienced a much more discontinuous transition,
which led to decades of instability. This trajectory foreclosed the possibility of developing a
statist culture on par with Brazil’s.
Thus, although the paper sets out to explain the contemporary gap in tax level between
Brazil and Mexico, the argument ends up emphasizing the role of historical critical conjunctures
and the long-lasting institutions and attitudes they fomented on the part of both popular sectors
and elites. It thus forms part of the growing historical institutionalist literature.
The core of the paper unfolds in four sections: the first compares the tax systems of
Brazil and Mexico, focusing mainly on the level of taxation; the second assesses existing
theories of taxation in light of this empirical comparison; the third develops the link between
popular sector incorporation and taxation; and the fourth discusses how taxation has been shaped
by differing modes of transition to national independence. These sections are followed by a brief
conclusion that summarizes the main arguments and underscores their broader relevance.
Taxation in Brazil and Mexico
In recent years the Brazilian state, including all levels of government, has collected
nearly three times as much tax revenue as its Mexican counterpart relative to the size of their
respective economies. Brazilian tax revenues have averaged 33.5% of GDP in the last decade,
compared to 11.8% in Mexico (INEGI 2010; Gobetti and Orair 2010). Brazil’s taxation level
during this period was the highest in Latin and is close to the average for the Organization of
Economic Cooperation and Development (OECD) countries. Meanwhile, Mexico’s tax burden is
one of the lowest in the region, and comparable to those of much poorer countries like
Guatemala and Paraguay (Jiménez et al 2010, p. 27).
The Brazilian state’s superiority in generating tax revenues is not a recent phenomenon.
As Figure 1 suggests, since 1900 there has been only one period, during the 1920s and early
1930s, in which Mexican revenues were comparable. This temporary convergence appears to
have been driven mainly by the crisis of Brazilian foreign trade beginning with the onset of
World War I, which delivered a sustained blow to trade taxes, the core of the revenue system at
that time. This effect was apparently not as strong in Mexico, perhaps because of a lower initial
dependence on trade taxes.2 By 1940 Brazil again had a clear advantage, reflecting in part its
transition to a system based mainly on domestic taxes (Oliveira 2010). Thirty years later
(following a major tax reform in the mid-1960s) Brazilian tax revenues were almost two-and-ahalf times those of Mexico. The Mexican state made up some ground during the 1970s and
1980s, but since then the gap has grown steadily wider. Despite attempts to restructure the tax
system in the 1980s, Mexican revenues have actually declined. Meanwhile, in Brazil they have
consistently risen, at a rapid clip in the 1990s and more gradually in the last decade.
Figure 1. Taxation Level, 1900-2009
Tax Revenue (% GDP)
40
35
30
25
20
Brasil
15
Mexico
10
5
0
Year
Sources: Diaz-Cayeros (2006); IBGE (2006); INEGI (various years); IPEA (2010)
Available data do not allow us to compare tax burdens prior to 1900 in a systematic way,
but an estimate of tax burdens across Latin America circa 1870 suggests that Brazilian per capita
revenues were more than double those of Mexico (Sokoloff and Zolt 2006, 115). Since the two
countries had a similar per capita GDP at the time (Maddison 1995, 24), Brazil’s tax revenues in
proportion to GDP were probably also about double Mexico’s. In fact, Brazil was one of only
two Latin American countries in the late 19th century whose revenues were comparable to those
of the United States, at roughly 7-8% of national income (Sokoloff and Zolt 2006, 115).
Although data are lacking, analyses of early post-colonial public finances in Latin America
underscore the exceptional solidity, on the one hand, of the Brazilian revenue system, and the
extreme weakness, on the other, of its Mexican counterpart (Marichal 2006).
I have also not seen data that would allow a Brazil-Mexico comparison of preindependence tax revenues as a proportion of the economy. However, there is good reason to
believe that Brazil’s superiority in generating tax revenues does not extend back to the colonial
era. Indeed, the Spanish revenue system in Mexico, especially following the crucial Bourbon
reforms of the second half of the 18th century, which asserted greater control over Spain’s
2
In 1910, for example, trade taxes accounted for 46.7% of federal revenues in Mexico,
compared to 69.6% in Brazil (IBGE 2006; INEGI 2010).
colonial holdings, produced large amounts of revenue that not only supported the colonial state
but also subsidized both Spain itself and some of its other American colonies (Tenenbaum 1986;
Marichal 2006). Portugal also extracted substantial amounts of revenue from Brazil, but the
Portuguese Crown’s own 18th century attempts to strengthen its grip over its American colony
were not as sweeping as those of Spain (Bethell 1989).
Relative to GDP, Brazil’s contemporary tax revenues exceed those of Mexico in every
major category (see Table 1). However, Mexico is closer to Brazil with regard to direct taxes
(income, property and capital gains) because income taxation contributes a larger proportion of
the tax take than in Brazil. The biggest differences between the two countries involve taxes on
good and services (e.g., the value-added tax), as well as social security. Both countries have seen
changes in their tax structures over time. In Mexico direct taxes rose steadily in importance
between the introduction of the income tax in 1925 and the early 1970s, but stabilized thereafter
at roughly half of all tax receipts (Aboites Aguilar 2003, p. 37). The weight of direct taxes in
Brazilian tax revenues rose to a third in the 1940s, dropped to less than 10% in the mid-1960s,
then increased gradually to its current level, which is similar to that of the 1940s (Varsano 1996;
Oliveira 2010). One striking trend in recent decades involves the divergence in social security
revenues. In the last two decades Brazilian social security contributions have grown from about
6% of GDP to 9%, while in Mexico they have fallen from roughly 2.5% to 1.5% (Rofman et al
2008). This reflects the partial privatization of Mexico’s system, on the one hand, and the
impressive growth of Brazil’s purely public system, on the other (Brooks 2009).
Table 1. 2008 Tax Structure (% of GDP)
Tax Category
Brazil
Income, Property and Capital
10.5
Gains
Goods and Services
15.1
International Trade
0.6
Social Security
8.8
Other Taxes
0.5
Total
35.5
Source: Jimenez and Gómez Sabaini (2009)
Mexico
5.5
3.7
0.3
1.3
0.2
10.9
It is important to point out that the Mexican state has enjoyed much larger non-tax
revenues, especially since the oil boom of the late 1970s and early 1980s, which transformed the
state oil company, Petróleos Mexicanos, or PEMEX, into one of the world’s largest petroleum
companies. PEMEX revenues enter the federal treasury through a variety of fees and levies on its
production. These are considered non-tax revenues because PEMEX is part of the Mexican state
and makes money by selling its products on domestic and foreign markets. Nevertheless, as I
explain below, even if we include non-tax sources, the Brazilian state’s superiority in gathering
revenues remains impressive.
Assessing Existing Theories of Taxation
Given the importance of taxation to the functioning of the state, it is unsurprising that
scholars have produced a wide range of theories that purport to explain variation in taxation level
or, more generally, the size of the public sector. Nevertheless, as I argue below, most of these
shed little if any light on the puzzle examined here. Only the body of work on the impact of
extractable natural resource wealth on state institutions provides some leverage on the question
of why Brazil has a higher tax burden than Mexico, and even in this case the answer it provides
is quite incomplete.
Perhaps the oldest and most widely accepted theory of taxation level involves Wagner’s
Law: the idea that rich countries spend a larger proportion of their national income on the public
sector than do poor countries. This relationship has been attributed to a variety of causes,
including accelerating demand for public services and the growing influence of organized
interest groups. Unfortunately, the law breaks down in this case, since on a per capita basis the
countries are similarly developed today and, historically, Mexico has generally been somewhat
wealthier (see Figure 2).
Figure 2. Per capita GDP, 1890-1994
1990 international dollars
6000
5000
4000
3000
2000
1000
0
1890
1900
1910
1920
Source: Maddison (1995)
1930
1940
1950
1960
1970
Brazil
1980
1990
Year
Mexico
Another economics-based theory suggests that taxation level is positively correlated with
trade openness because countries with liberal trade policies are more vulnerable to external
shocks and are thus pressured to develop more extensive social safety nets, which of course
requires greater revenues (Rodrik 1996). Once again, the theory’s prediction is contrasts with the
empirical outcome in this case. Although Brazil and Mexico have experienced similar historical
trajectories in terms of their openness to trade, since at least World War II Brazil has generally
had a higher level of tariff protection than Mexico (Graham 1982, p. 25; WTO).
A substantial literature attempts to relate differences in both taxation and spending to the
structure of political institutions. Much of this work is based on the experiences of rich
democracies, and its arguments are in most cases of little relevance for my comparison. Some
theories focus on variables (e.g. presidentialism versus parliamentarism) that are essentially
constant across the two cases I am dealing with. Even when some variation arguably can be
found between the cases, the theories presuppose an extended history of free and fair elections
that does not exist, especially in Mexico.
One institutional argument that does seem relevant emphasizes the distribution of power
between national and subnational levels of government. A longstanding idea in this vein is that
robust federalism reduces the tax burden, mainly because it allows private actors to shop around
for the lowest tax rate, putting downward pressure on subnational taxes (Brennan and Buchanan
1980). However, later analyses have underscored that the tax-depressing effects of federalism
depend on the nature of the fiscal relationship between the central government and lower levels.
Systems in which subnational spending is paid for mainly by federal transfers rather than ownsource revenues create perverse incentives that may actually increase spending and taxation
(Rodden 2003). As it turns out, neither version of the theory has predictive power with regard to
the Brazil-Mexico comparison. Although both countries nominally have federal systems, Brazil’s
is far more decentralized (Diaz-Cayeros 2006). Brazilian states and municipalities not only
account for a larger proportion of total spending, but they also obtain much more of their revenue
from their own sources, rather than transfers.
Another potentially relevant institutional theory is the notion that the size of the public
sector is influenced by political regime type. There is a venerable tradition of arguing that
democracy promotes equality by allowing the lower classes to use their numbers to press for
substantial redistribution, which in turn implies a larger state (Gradstein and Milanovic 2004). At
first glance, this argument would seem to fit the cases under study here, since Brazil established
its current democracy in 1985, at least a decade earlier than Mexico, and also experienced a prior
period of competitive party politics between 1946 and 1964. Mexico, for its part, never
experienced a sustained period of open political competition prior to its transition from one-party
rule by the Institutional Revolutionary Party (PRI) during the 1990s.
Nevertheless, there are number of reasons to doubt this argument. First, the evolution of
the tax burden within the two countries does not support the conclusion that democracy was
more conducive to higher taxation. For example, Mexico’s democratization over the last two
decades has been accompanied by a decline in the tax level, and even in the overall level of
public revenues relative to GDP. Meanwhile, Brazil’s repressive military dictatorship was
responsible for the largest single tax increase in the country’s history in the mid-1960s (Oliveira
2010). Second, Brazil’s democratic advantage fades if we consider not only party competition,
but the breadth of the suffrage. In contrast to Mexico, which established universal suffrage in
1917, Brazil denied the suffrage to illiterates until 1985, meaning that much of the low-income
population was excluded from the 1946-1964 regime. Finally, as I pointed out earlier, Brazil’s
advantage in taxation emerged in the early-to-mid 19th century, long before either country could
reasonably be considered a democracy.
A related theory is the idea that in a democracy the level of taxation is determined by the
degree of income inequality (Meltzer and Richard 1981). Here again, the cases offer some
evidence consistent with this view. In recent decades both countries have moved toward greater
democracy, yet Brazil’s inequality has been significantly higher, with a Gini coefficient
averaging around 0.60, compared to Mexico’s 0.50 (ECLAC 2010, pp. 172-173). That would
lead us to expect more redistribution and higher taxes, which is roughly what we have seen.
Since 1985 Brazil’s tax burden has increased by 10% of GDP and much of that has been driven
by increased social spending, some of which is quite redistributive. In Mexico, in contrast, the
last two decades have brought a decline in tax level.
Have these outcomes been a result of the causal process outlined in the Meltzer-Richard
model? Some evidence suggests they are. For example, a Latinobarómetro study asked whether
“government should reduce the differences between rich and poor” (Latinobarómetro). The
proportion of respondents who responded “yes, of course” – the strongest possible endorsement
of this view – was 74.1% in Brazil, compared to 58.3% in Mexico. However, other facts point in
the opposite direction. In particular, Meltzer-Richard suggests that preferences for redistribution
are a direct function of socioeconomic status. It is the poor who demand it and the rich that resist.
That relationship can be found in the Mexican case, where the extent of agreement with the
survey question is inversely proportional to economic status. Yet, it is entirely absent in Brazil.
In fact, the two highest economic status categories registered the highest level of agreement.
Thus, the stronger preference for redistribution among Brazilians does not seem to be driven by
class-based interests.
A different, but equally influential theoretical current relates the size of the public sector
to the strength of certain organized actors, especially labor unions and left parties, representing
lower-class interests. The idea is that such organizations tend to push for generous social and
labor market policies that redistribute income in favor of their constituents and thus tend to
increase the tax burden (Cameron 1978). Once again, however, the theory does not shed light on
the contrast between Brazil and Mexico.
The variables typically used to assess labor power, especially union density and the
degree of organizational centralization of the labor movement, do not clearly separate Brazil
from Mexico. According to one study, the average rate of unionization between 1976 and 1995
was 28.8% in Brazil and 26.0% in Mexico (Blanchflower 2006, p. 30). In 1991, according to
another work, the proportion of union members in the formal labor force was somewhat higher in
Mexico (Cook 2007, p. 22). In addition, Mexico’s labor movement has traditionally been
somewhat more centralized than Brazil’s (Murillo and Schrank 2006).
The version of this theory that stresses left-party control of the state also falls short, since
nominally left-of-center parties have been in power much longer in Mexico. Mexico’s PRI,
which (under various names) controlled the state from the late 1920s until the mid-1990s,
presented itself publicly as a center-left party and had strong ties to labor and peasant
organizations. In Brazil, government control by left-leaning parties with links to popular sectors
has been more limited. The center-left Workers’ Party (PT) has been in power since 2003, but
one has to go back nearly 40 years to find another instance in which such a party, the Brazilian
Labor Party (PTB), controlled the executive branch.3 Moreover, neither the PTB nor the PT ever
controlled even close to a majority of its own in the legislature.
A more recent perspective comes from the growing body of work that examines the
origins and impact of “tax morale,” or the willingness of citizens to voluntarily comply with laws
governing taxation. These studies take as a point of departure the observation that tax
compliance varies substantially among countries, and can influence differences in the level of tax
revenue. Part of this variation can be accounted for by the extent of enforcement. However,
researchers have argued that the threat of punishment does not suffice to explain differences in
compliance. Other, more subjective forces are also at work, having to do with public perceptions
about the efficiency, honesty and legitimacy of the state (Fauvelle-Aymar 1999). States that are
perceived as incompetent, corrupt or unrepresentative of the interests of society may suffer from
high rates of non-compliance, since citizens feel little moral duty to provide them with revenue.
Some recent analyses of Mexico’s tax system have posited low tax morale and
consequent high evasion as a central reason behind the country’s low tax burden (Mayer-Serra
2001; Bergman 2006). Moreover, survey data do, in fact, indicate a somewhat lower level of tax
morale in Mexico than Brazil. For example, on five instances between 1998 and 2008
Latinobarómetro included a question asking respondents to rate the justifiability of evading taxes
on a scale of one to ten, where one indicates that evasion is totally unjustified and ten that it is
completely justified. The average value across all five years was 2.7 in Brazil and 3.2 in Mexico.
The average for Latin America as a whole was in between these two values: 2.9. The percentage
of respondents who said tax evasion is never justified was 52.3% in Brazil, 45.6% in Mexico and
49.9% in the region as whole.
Nevertheless, the available evidence suggests that Mexico’s lower tax morale does not, in
fact, produce greater tax evasion. Perhaps the most ambitious and systematic attempt to compare
rates of evasion among Latin American countries is Jiménez et al (2010), which focuses on
income tax. Surprisingly, the authors find that of the seven countries examined, Mexico has the
lowest rate of income tax evasion. Unfortunately, this study does not include Brazil, but given
the fact that Mexico outperformed even Chile (which is often seen as the region’s most lawabiding country), it seems unlikely that Brazilian evasion rates would be significantly lower.
Some additional pieces of evidence also cast doubt on the idea that tax evasion is behind
the taxation gap between Brazil and Mexico. First, Latinobarómetro survey data suggest that
compliance with the value added tax (VAT) is greater in Mexico. In 2003, 2004 and 2005 the
survey asked “When you go shopping how often do you pay the VAT?” In all three years, a
substantially larger proportion of Mexicans said they paid the VAT “always” or “almost
always.”4 Second, Brazil’s informal economy is significantly larger than Mexico’s. Between
1990 and 2003 the informal sector as a share of GDP was consistently 8-9% larger in Brazil
(Jiménez 2010, 22). Since informal sector businesses almost by definition do not pay taxes,
informality can be seen as a proxy for tax evasion by small enterprises. Finally, Alm and
Marínez-Vasquez (2007) report data from the World Bank’s Enterprise Surveys on a question
3
And, in that instance, the PTB took over the presidency only because the conservative who had
been elected to that office unexpectedly resigned. That president, João Goulart, was overthrown
by the military in early 1964.
4
The averages were 48.8% in Brazil and 74.3% in Mexico (Latinobarómetro).
that assesses corporate tax compliance by asking business executives to estimate tax evasion in
their sector. Of the eight countries for which data are reported, Brazil had the second highest
rate. Unfortunately, this article does not report data for Mexico, but these results certainly
suggest that corporate tax compliance in Brazil is not especially high.
In my view, the only extant theoretical ideas on taxation that offer much explanatory
leverage in this case are those rooted in the scholarship on the impact of natural resource wealth
on the state. Numerous works have noted that the existence of plentiful extractable natural
resource in the national territory tends to suppress taxation (Ross 2001). Since taxation is
technically and politically challenging, leaders with easy access to natural resource rents tend to
rely on those rents and to forego heavier taxation. The state’s capacity to extract tax revenues
from society therefore erodes or is simply never developed.
We cannot know for sure, but it is hard to imagine that the Mexican state would have a
tax take similar to that of much poorer countries if it could not rely on a generous flow of nontax revenue from PEMEX, equal in recent years to roughly 35-40% of total revenues. There is
broad agreement that the availability of oil revenues has worked against greater taxation (MayerSerra 2001; Tello and Hernandez 2010). Brazil also has a state oil company, Petróleo Brasileiro
(or Petrobras), but oil production developed later than in Mexico. While petroleum was already a
substantial sector of the Mexican economy by the 1930s, when President Lázaro Cárdenas
nationalized it, Brazilian domestic oil production did not begin in earnest until 50 years later, in
response to rising global oil prices (Tordo et al 2011). The lag was due to the difficulty of
extracting Brazil’s oil reserves, which are located mainly in deep offshore fields. Moreover,
because the creation of Petrobras in 1953 lacked the profound nationalist significance of
Cárdenas’s expropriation of U.S. and British oil companies, Brazil has been less zealous about
keeping oil revenues to itself. In 1997 it opened Petrobras to private investors, retaining only
40% ownership. Compared to PEMEX, Petrobras has been a minor source of public revenue,
which has helped it achieve higher levels of investment (Tordo et al 2011).
Nevertheless, the importance of oil to Mexico’s low tax level should not be exaggerated.
In the last decade total public revenues (including non-tax revenues) in Mexico have averaged
about 19% of GDP, compared to more than 35% in Brazil. Moreover, the Brazilian state’s
superiority in raising tax revenues goes back historically not only far beyond the Mexican oil
boom of the late 1970s but even before the beginning of commercial petroleum production in
Mexico in 1901. Thus, although extractable natural resource wealth undoubtedly helps to
account for Mexico’s exceedingly low tax revenues relative to Brazil, it is by no means a
complete explanation.
Since existing theories of taxation do not provide a satisfying account of the gap in
taxation level between these two countries, it is necessary to explore other avenues. In recent
years social scientists have increasingly turned to history to account for contemporary
phenomena whose origins otherwise cannot easily be understood. This “historical
institutionalist” school has posited that certain moments of major change, or “critical junctures,”
can put societies on paths of economic or political development that are self-reinforcing and thus
difficult to subsequently deviate from (Capoccia and Kelemen 2007). Such historical “path
dependence” can be strong enough to resist contemporary conditions that would otherwise push
these societies in a different direction. This analytic approach has been applied to a wide range of
phenomena, but it has only rarely been used to explain tax policies.5
I believe something along the lines of path dependence is behind the sharp contrast in
taxation levels between Brazil and Mexico. In particular, I highlight two historical moments that
appear to have set these countries on their distinctive paths: the transition from colonial rule to
independent nationhood in the early 19th century, and the initial political “incorporation” of
popular sectors, which occurred roughly a century later. The latter process reinforced the effects
of the former in terms of shaping each country’s taxation level, but the causal mechanisms at
work were different, as I explain below. Although it might seem more logical to develop this
account beginning with the earlier “critical juncture,” I nonetheless start with the second because
my argument concerning popular sector incorporation is inscribed within an existing, influential
analysis of political development in Latin America’s middle income countries (Collier and
Collier 1991). By demonstrating both the force and limitations of this argument, I lay the
groundwork for the deeper historical account.
Taxation and Popular Sector Incorporation
Following the Colliers, by initial popular sector incorporation I mean a clear shift in state
policies from a strategy of dealing with mobilization by lower class groups primarily through
repression to one that attempts to meet at least some of their key demands. Expanding on an
earlier work (Collier 1982) on Brazil and Mexico, Collier and Collier (1991) argue that the
character of this process played a fundamental role in shaping the subsequent political dynamics
of the more developed Latin American countries, including the extent of class conflict and
regime stability. It created certain political alignments, or lack of alignment, that would persist
for many decades despite changes in other (especially socioeconomic) conditions.
Although it occurred at roughly the same time, incorporation in Brazil and Mexico took
on a very different complexion. In the Brazilian case, it involved relatively modest changes in
the political and economic regime. Between 1930 and 1945, President Getulio Vargas extended
to the most organized sectors of the urban working class a series of benefits, including pensions,
healthcare and modest labor protections (Malloy 1979). He also crafted a corporatist system that
offered channels of representation but at the same time established an elaborate set of legal
mechanisms through which the state would seek to control unions. These reforms were limited
entirely to the urban sector; the countryside was left untouched.
In comparison, the process of popular sector incorporation in Mexico involved far more
profound changes. The revolution of 1910-1920 had eradicated Porfirio Díaz’s conservative
regime and the 1917 Constitution created the promise of nationalist and progressive reforms.
During the 1920s and early 1930s the victors of the revolution crafted a power-sharing
arrangement, embodied in the National Revolutionary Party (PRN), and implemented some labor
reforms. However, the social promises of the revolution would go unfulfilled until the presidency
of Lázaro Cárdenas (1934-1940). Cárdenas undertook one of the largest agrarian reforms in
5
Perhaps the most important application of the path dependence concept to tax policy is Kato
(2003).
Latin American history, strengthened labor through legal reforms and political support in
industrial conflicts, and nationalized the oil industry. Cárdenas also restructured the ruling party
along corporatist lines, creating institutions meant to represent workers, peasants, and other nonelite groups (Hamilton 1982). To underscore the significance of this change, he renamed the
party, calling it the Party of the Mexican Revolution (PRM).
These contrasting patterns of incorporation would have major implications for the future
political influence of organized popular sectors. The Cárdenas reforms bound labor and peasants
to the PRM (which was renamed the Institutional Revolutionary Party, or PRI, in 1946) though a
combination of ideology and leadership cooptation. PRI presidents would still need to offer
certain economic inducements from time to time to reinforce peasant and labor loyalty over the
coming decades, but the political ties created during this period would effectively prevent broadbased popular opposition to the PRI. In the process it helped stabilize Mexican politics for
decades, even as instability was wracking the rest of the region.
In contrast, the initial incorporation of the Brazilian working class created little loyalty to,
or ideological affinity with, a particular party. The peasantry, moreover, remained wholly
unincorporated. As a result, Brazilian popular sectors retained greater political autonomy and
bargaining leverage. Parties were forced into an ongoing competition for labor support and
progressively more militant groups emerged and pressed for greater benefits. Peasants also
awoke from their political slumber in the early 1960s, engaging in widespread protest for land
and labor rights. As Ruth Berins Collier points out, “The competitive bidding for popular sector
support in Brazil worked to the advantage of the popular sectors, which were thus in a better
position to exert pressure in the arena where policy decisions took place. In Mexico, by contrast,
the regime served to perform the legitimating task and the constituency work of the state and at
the same time has insulated the decision-making arena from popular pressures” (Collier 1982,
pp. 96-97). The increasing polarization of Brazilian politics would eventually lead to a
conservative military coup d’état in 1964.
The economic and political transitions set in motion in both countries during the 1980s
would change the relationship between popular sectors and the state, but the legacies of initial
incorporation continued in important respects. In Mexico, labor’s close relationship with the PRI
eroded under the weight of economic recession and the sweeping liberal reforms adopted under
Miguel de la Madrid (1982-1988) and Carlos Salinas (1988-1994). Yet, it is generally recognized
that the ruling party’s ties to labor helped it achieve relatively rapid stabilization and fragmented
opposition to state-reducing reforms (Teichman 2001; Cook 2007). Brazilian labor, meanwhile,
developed into an even stronger and more independent actor during the late 1970s and 1980s.
Labor unions were the key force behind the creation of the PT in 1980, and in 1983 they founded
the leftist Unified Workers’ Central, or CUT, a national union confederation. As part of her
comparative analysis of labor reforms in Latin America in the 1990s, Cook argues that the labor
movement was a stronger actor in Brazil than in Mexico during this period. The difference, she
argues, was due not to structural or organizational characteristics, which were roughly equivalent
in the two countries, but to Mexican labor’s lack of political autonomy vis-à-vis the ruling PRI,
which undercut its ability to influence policy (Cook 2007, pp. 20-23).
Political mobilization in the rural sector displays a similar pattern. The Brazilian military
regime sought to quell rural unrest by promoting the growth of rural unions that provided
pensions and other modest benefits. While these entities grew rapidly, their subservience to a
regime that had rejected the more fundamental demand for agrarian reform meant that they failed
to garner much loyalty. The lack of peasant political incorporation left a vacuum that was filled
by progressive church activists as the regime began to weaken. Their efforts led to the creation of
the militant Movement of Landless Rural Workers (MST), which became a prominent,
nationwide force for agrarian reform in the 1990s (Ondetti 2008). In Mexico, meanwhile, despite
the adoption of a number of policies with adverse consequences for the rural poor, peasant
political mobilization in recent decades has been limited and regionally fragmented. The
lingering influence of the PRI’s corporatist and clientelist mechanisms helped to forestall the rise
of a broad-based, independent peasant organization on the order of the MST. Instead, easily the
most visible manifestation of peasant discontent was the Zapatista National Liberation Army.
Although the EZLN’s appearance in early 1994 turned many heads, its presence in only one
small state has limited its domestic influence.
The Colliers’ analysis of the legacies of incorporation does not examine the implications
of different incorporation processes for tax systems. However, the contrasting modes of
incorporation in Brazil and Mexico do provide some leverage on the disparate levels of taxation
observed today in these two countries. Brazilian labor’s pressure for increased social security
benefits and patronage jobs contributed to steadily mounting spending during the first two postWorld War II decades (Malloy 1979; Collier 1982). Although Brazil faced growing fiscal
deficits, tax revenues also increased rapidly, as authorities sought to keep up with the rising
demands placed on the state. Meanwhile, Mexico’s “stabilizing development” strategy during
roughly the same period featured an austere fiscal policy anchored by an extremely low level of
social spending, even by Latin American standards (Hansen 1971). This strategy was facilitated
by the political subordination of labor (Collier 1982).
Brazil’s 1964 coup brought popular mobilization to an abrupt halt. However, it also
resulted in a major tax reform that greatly increased public revenues. Although the military’s
priority was bolstering the state’s capacity to promote economic growth, some of its initiatives
also betrayed a concern with forestalling new bouts of lower class radicalism. Social security
spending grew as new groups were integrated into the system, especially peasants, who were the
beneficiaries of a major new non-contributory social insurance program. By the mid-1970s social
security had been “all but universalized” (Malloy 1979, p. 134). In addition, massive road
construction and colonization projects in the Amazon basin sought to relieve pressures for land
redistribution in other regions.
Since the end of the military regime, Brazilian labor has been an important force
propelling the continued expansion of the state. Unions, for example, were active participants in
the constituent assembly of 1987-1988, which drafted a constitution that expanded the state’s
social policy mandate and was instrumental in the steady increase of both social spending and
taxation during the 1990s and early 2000s (Affonso 2006). Labor has also fought (for the most
part successfully) attempts to revert this process through constitutional reform, and has pushed
for minimum wage increases, which raise the lowest pension payments. Rural sector groups have
not had as big an impact on fiscal policy, but since the mid-1980s spending on programs for the
landless and smallholders has increased markedly, attenuating the decline in overall farm
spending (Chaddad and Jank 2006).
The comparative weakness of Mexican popular sectors has kept them from being
effective advocates for an activist state in recent decades. For example, while Brazilian unions
and other civil society groups were working successfully to consolidate and expand the public
social insurance system, Mexican unions failed to impede one of the most sweeping social
security privatizations in Latin America (Brooks 2009). Partly as a result of this divergence,
social security taxation is now more than five times heavier in Brazil. In the rural sector, to cite
another example, peasants were unable to muster broad-based resistance to Salinas’ bid to legally
terminate the process of land redistribution initiated by Cárdenas, which removed the state from
yet another area of economic intervention.
Thus, there are reasons to believe that the differing legacies of initial popular sector
incorporation have contributed to the contemporary gap in tax burdens between Brazil and
Mexico. Nevertheless, other pieces of evidence point to the limits of this explanation, even when
combined with the natural resource variable. For one thing, the Brazilian state’s superiority in
collecting tax revenues long predates popular incorporation, not to mention the Mexican oil
boom. In fact, the evidence outlined earlier in the paper suggests that it goes back to the early
19th century. In addition, while an emphasis on incorporation implies that the key force behind
revenue collection in Brazil has been to provide social benefits for these groups, in reality the
growth of the state is a more general phenomenon. Development initiatives like infrastructure
investment and the provision of credit to the private sector have also played a large role. In
comparison to its Mexican counterpart, the Brazilian state has been much more deeply involved
in the process of capital accumulation (Graham 1982, p. 42). In addition, political patronage
aimed at middle class groups has also contributed.
Taxation and Independence
In my view, these facts point to the lasting effects of contrasting paths to independence.
The character of the transition from colony to independent nation appears to have had an
enduring impact on attitudes toward state intervention in the economy in the two countries,
particularly among private sector elites, helping give rise to a broader acceptance of state
intervention in the Brazilian case.
Within Latin America, Brazil and Mexico constitute virtually opposing poles with regard
to how independence was accomplished. The Brazilian experience was quite unique. Fleeing
Napoleon’s forces, the Portuguese monarchy moved to Brazil in 1807. Although King João VI
would return to Lisbon in 1821, his son Pedro stayed on as regent and soon declared
independence from Portugal, becoming Emperor of Brazil. The Portuguese monarchy did not
consent to Brazil’s independence, but it did not attempt to impede it by force, either. Transitional
political troubles would lead Pedro to abdicate in 1831, but he was replaced by his son, Pedro II,
who reigned until the peaceful end of the Empire in 1889. Brazil was not without its problems
during this period (including some short-lived regional rebellions before 1850) but relative to
Mexico it was a model of peace and stability.
In comparison, Mexico’s experience was quite traumatic, involving a decade-long armed
conflict with Spanish colonial forces that devastated the economy and, worse still, left a vacuum
of political authority that would only be filled several decades later. Between its independence in
1821 and the early 1870s the country experienced almost constant instability and armed conflict.
Conflict was driven both by ideological differences, especially between pro-Catholic Church
conservatives and anti-Church liberals, and struggles between various military caudillos. Given
the chaos that reigned during this period, it is unsurprising that Mexico lost a war with the United
States (1846-1848), which cost it half its territory, and suffered an armed intervention by the
French, who briefly (1864-1867) imposed a monarchical regime.
That these differences would affect the level of taxation during the early- and mid-19th
century is also not surprising. The stable political order that reigned in Brazil was much more
conducive to effective public policymaking than the anarchy that gripped Mexico. Yet, there is
evidence that these contrasting transitions to independent statehood also shaped elite attitudes
toward the public sector in a more enduring way, encouraging the formation of a large, activist
state in Brazil, while inhibiting such an outcome in Mexico.
Discussions of Brazilian state interventionism often stress the reforms undertaken during
the 1930s and early 1940s under Vargas. Yet, as I mentioned earlier, Brazil already had an
exceptionally high level of taxation relative to GDP by the 1870s. By the first decade of the
twentieth century it was higher than that of either Great Britain or the United States, both far
more developed societies (Topik 1978). Studies of the First Republic (1889-1930) and even the
late Empire note the marked presence of the state in the economy (Topik 1987; Da Costa 1989).
Scholars have also remarked on the prominence of the state as a provider of political patronage,
often in the form of bureaucratic jobs (Schmitter 1971; Graham 1990). Although World War I
would deliver a significant blow to state expansion, especially on the revenue side, this process
would gain new vigor during the Vargas years.
In contrast, the Mexican public sector remained rather small even under Porfirio Díaz
(1876-1910), who brought an extended period of political peace and rapid economic growth.
Díaz made important gains in consolidating a working fiscal system during the early years of his
regime, but after the mid-1890s, revenues stagnated in relation to output (Marichal and
Carmagnani 2001). Fiscal deficits were eliminated, but on the basis of lower spending, not
higher taxes. The tax system was not significantly reformed during this period, seemingly
reflecting an official determination not to put additional pressure on the new wealth created by
the booming economy (Carmagnani 1994).
The divergence between Mexico and Brazil during the Diaz period is significant because
it can be attributed neither to the subsequent revolution in Mexico nor to the instability that
afflicted that country following independence, since Diaz had achieved an impressive degree of
political order by the 1890s. Nor can it easily be attributed to contemporary economic or political
conditions. For example, both countries were experiencing rapid, export-led growth and neither
could readily be described as a democracy. Rather, this divergence would appear to
reflect the impact of enduring path dependence effects generated by differing modes of transition
to independent statehood. What is the exact nature of this path dependence? In my view, there
are two plausible perspectives on this question.
One perspective would stress the degree of continuity with the colonial period. In the
Brazilian case, the lack of a violent, protracted conflict with the colonial power may have
facilitated the survival of Portuguese traditions, including an interventionist approach to
economic affairs. In fact, Brazilian analysts of varied intellectual stripes have made essentially
this argument (Faoro 1958; Prado 1999).6 Modern Brazilian statism from this perspective simply
reflects a continuation of “the bureaucratic tradition of a monarchy like the Portuguese one,
which from at least the 15th century, and for the entire period in which it presided over Brazilian
colonization, held in its hands the principal economic initiatives and undertakings of the nation”
(Prado 1999, p. 123). Given the important parallels between Portuguese and Spanish societies
during the colonial period, Mexico might also have evolved in a statist direction had the
independence process involved greater continuity. However, the fact that the break with the
mother country involved a long, bitter war caused a large sector of Mexican society to reject the
Spanish legacy. It was precisely this sector, the liberals, who ultimately gained the political
upper hand under Benito Juárez and, more definitively, Porfirio Díaz.
The second possibility is that this divergence reflected the impact of ideas or institutions
that arose after independence. More specifically, the precocious expansion of the Brazilian state
could be seen as a product of the exceptional peace and stability of the Empire. The lack of deep
divisions among the economic elite facilitated their use of the state to promote the common goals
of fortifying class domination, protecting the slave trade and maximizing commercial
opportunities (Graham 1990). The Empire period may thus have fostered a relatively benign
view of the state. Meanwhile, in Mexico, chronic conflict, combined with the predatory tactics
(e.g., expropriation, force loans, debt default) used by authorities desperate to obtain the
resources needed to stave off rivals, engendered skepticism of the state’s ability to accomplish
practical tasks, a skepticism that may well have outlived the post-independence conflicts.
The idea of an accumulated state credibility deficit is central to recent analyses of the
Porfiriato by economic historians (Haber et al 2003). They argue that, given the historical legacy
of chronic instability, Díaz was unable to either tax effectively or to obtain loans through
conventional channels. In the face of this dilemma he chose to form close alliances with a small
group of wealthy interests. The latter provided Díaz with the minimum revenues he needed to
maintain peace and create basic economic infrastructure. In return, Díaz rewarded them with
privileged opportunities to extract rents from the economy. Although successful in generating
growth, this approach gave the regime a narrow base of support and probably contributed to its
violent demise. Haber and his collaborators argue, moreover, that the post-revolutionary
Mexican state, although enjoying a broader base of support than Diaz, never decisively broke
with this pattern.
The first of these two perspectives is backed by a deeper scholarly tradition, but certain
objections can be raised to it. First, neither Portugal nor Spain has a particularly interventionist
state today. Their revenue-to-GDP ratios are about average for the OECD.7 If the Iberian
tradition were fundamentally interventionist, should we not expect this to be reflected in the
public sectors of the two Iberian countries? Second, in the Mexican case, economic liberalism
has since at least the 1930s been associated with Catholic social conservatism, which is a curious
6
Faoro’s version of this argument features a politically autonomous state as the carrier of
Portuguese traditions. Prado’s work gives much more weight to class actors, but he nevertheless
sees Brazil’s “bureaucratic capitalism” as being rooted in colonial legacies.
7
They are also similar to Brazil on this variable, but it should be underscored that Portugal’s per
capita GDP is roughly double Brazil’s and Spain’s is about three times as high. Given Wagner’s
Law, Brazil’s taxation level is considerably more impressive.
inversion of pre-revolution realities. There are explanations for this change, of course, but in any
event it discourages the view that contemporary liberalism in the economic sphere represents a
continuation of the 19th century liberal tradition.
For these reasons, I would tend to favor the second account over the first. However, they
are not necessarily mutually exclusive and, for the purposes of this paper, what is most important
is that both of them clearly involve path dependence derived from the critical juncture of the
independence process. In both explanations, the contrasting routes taken to independence gave
rise to distinct sets of attitudes and practices regarding the role of the state in the economy that
persisted beyond the historical circumstances that gave rise to them.
In addition to clarifying the early divergence of taxation levels between Brazil and
Mexico, a focus on the impact of modes of transition to independence helps to account for the
broad character of Brazil’s state intervention. As I mentioned earlier, an emphasis on differences
in popular sector incorporation, while useful, cannot by itself account for the fact that much of
the revenue collected by the state has been used for non-redistributive purposes, including
economic development programs and middle class patronage. In contrast, both of the arguments
sketched above point to the origins of a more general disposition to see the state as reliable
instrument for achieving common goals.
For much of the history of Brazil and Mexico, what was important was whether the elite
had this disposition, since the mass of the people were largely excluded from public decision
making. There is considerable evidence that the Brazilian elite have, in fact, embraced statism at
an ideological level, while important sectors of the Mexican elite have rejected it. Analyses of
post-1930s import-substitution policies in Brazil have stressed the ample support for a state-led
economic model, not only among industrialists, but other elite sectors, as well (Prado 1966;
Schmitter 1971; Sikkink 1988). For example, in her comparative study of post-World War II
developmentalism in Argentina and Brazil, Sikkink underscores the far greater consensus behind
state intervention in the latter country. “Liberalism,” she argues, “never took root in Brazil the
way it did in Argentina. The real debate in Brazil was not between the liberal model and the
planning model but within the developmentalist camp between cosmopolitan and nationalist
developmentalists” (Sikkink 1991, p. 67).
In Mexico, meanwhile, important sectors of the economic elite have displayed hostility to
state interventionism (Mizrahi 1993; Babb 2001). Mexico has long had one of the best politically
organized private sectors in Latin America, and a number of major business associations have
had a notably anti-state orientation, especially COPARMEX, one of the oldest (Schneider 2004).
The National Action Party (PAN), which was the only significant opposition party during the six
decades of PRI dominance, was created to defend free enterprise, as well as the Catholic Church.
It has had the support of many business owners, especially in northern Mexico. In the years after
World War II, the business community also bankrolled the creation of two universities meant to
counterbalance the leftist, statist tendencies of the public university system (Babb 2001). Such
organized anti-state actors have no real analogue in Brazil, where the most conservative, elitist
regime in the country’s modern history actually orchestrated a major expansion of the state,
including a large tax hike.
Over the last three decades, both Brazil and Mexico have undergone democratic
transitions that have established relatively free and fair elections. Hence, state authorities must
presumably pay greater attention to mass preferences today than in the past. In Brazil, the
relatively liberal Party of Brazilian Social Democracy (PSDB) achieved several years of electoral
success following the successful stabilization of the currency by its leader Fernando Henrique
Cardoso. Yet, in the last decade not only has the PSDB faded as an electoral force, but its
platform has arguably become less clearly liberal. During the 2010 election campaign, despite
the fact that Brazil had easily the largest state in the region outside of socialist Cuba, none of the
major parties was calling for tax and spending cuts. In contrast, the Mexican transition to
democracy has thus far brought two successive PAN presidencies. Thus, although relatively little
time has passed since the democratic transition, it appears that the preferences traditionally
demonstrated by each country’s elites are shared by a broad swath of the population.
Conclusion
The tremendous diversity in taxation levels among Latin American countries has largely
been neglected by scholars, a surprising fact given the manifest importance of taxation for
politics and governance. In this paper I have tried to shed light on one of the most perplexing
contrasts in taxation level in the region: the difference between Brazil and Mexico, two countries
that otherwise share many characteristics, especially in the economic realm. While Brazil’s tax
burden, at close to 35% of GDP, approaches the rich country average, Mexico’s amounts to
approximately a third of that level.
Probably the most obvious explanation for this contrast is the Mexican state’s much
greater reliance on non-tax oil revenues. While acknowledging the important role of this
variable, I have argued that it is far from a sufficient explanation, since even if we compare
overall public revenues, the gap between the two countries remains quite large. I have argued,
furthermore, that an adequate understanding of the contrasting levels of contemporary taxation
between Brazil and Mexico requires that we go back to two key historical processes, the
transition from colony to independent nationhood in the early 19th century and the initial political
incorporation of popular sectors in the 1930s, both of which created robust path dependency
effects. While the earlier “critical juncture” shaped elite attitudes toward state interference in the
economy, the latter affected the ability of popular sectors to pressure the state for greater
redistribution through taxation and social spending.
Although the paper deals exclusively with Brazil and Mexico, the arguments I have
offered here are quite relevant to the experiences of other Latin American countries. Latin
America boasts tremendous extractable natural resource wealth, but it is spread very unevenly
among the countries of the region. For every Venezuela or Ecuador, which possess very large oil
reserves, there is an Argentina or Costa Rica, which do not. Likewise, every country in the
region is a product of colonial rule, and in almost in every instance independence was achieved
in the early part of the 19th century. However, the character of the independence process and its
aftermath varied significantly from country to country. Finally, all of the eight countries included
in Collier and Collier’s (1991) study (and perhaps some others) experienced a distinct moment of
initial popular sector incorporation, but the mode of incorporation varied substantially, as the
authors convincingly argue. In other words, the hypotheses generated by this study of Brazil and
Mexico provide a sound basis for further exploration of the causes of variance in taxation level
across the region.
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WTO (World Trade Organization), Statistics Database:
http://stat.wto.org/Home/WSDBHome.aspx?Language=E.