Business Organisations, Party Systems and Tax Composition in Colombia and Peru: Understanding When Economic Elites Pay Taxes

This paper explores the relationship between socio-political institutions and tax compositions in developing countries. Based on a fiscal contractualism approach I propose conceiving the emergence of more progressive tax systems as a collective action problem and argue that the strength of business organizations and political party systems are associated to higher relevance of progressive taxes in the tax mix. Stable party systems and encompassing business organisations affect the acceptance of economic elites to pay more taxes because the former increases the credibility of the political interlocutor and the latter solves coordination problems among economic elites. One of the main claims is that linkage strategies between parties and economic elites have a significant effect on tax policy output and implementation. To substantiate my claims I compare the cases of Colombia and Peru. Following the tax performance literature both countries should be expected to tax similarly, but they tax very differently, indeed. The proposed variables account well for these divergent tax records over the time frame analysed (1970-2010). In addition they offer a plausible explanation of the within dynamics (or lack of it) in the countries analysed. Insights from interviews with key political and economic actors conducted in 2013 support the intuition of the argument. The broader significance of these findings is worth considering as they have strong implications for domestic and international efforts to support fairer and higher-performing tax systems in developing countries. First, the findings underline the claim that regardless the technical viability and pertinence of tax reform in developing countries, political and institutional factors shape what tax reforms are feasible. Second, beyond the broad generalisation that politics matter, this paper points to two specific factors that can be targeted by international cooperation to affect the self enfocing-equilibrium which tax composition mirrors.