Business Coordination and Tax Politics
| Date | 01 March 2017 |
| DOI | 10.1177/0032321715616287 |
| Published date | 01 March 2017 |
| Subject Matter | Articles |
Political Studies
2017, Vol. 65(1) 122 –143
© The Author(s) 2016
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DOI: 10.1177/0032321715616287
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Business Coordination
and Tax Politics
Néstor Castañeda
Abstract
Business interest groups are crucial actors for tax policy-making, but it is still unclear under which
conditions they are more successful than politicians in shaping taxation. This article argues that
centralised coordination and high levels of policy integration make business interest groups more
influential in the tax policy-making process. If there is no ideological convergence between agenda
setters and business, highly centralised and well-integrated business interest groups are more
successful in blocking or softening revenue-raising tax reforms or simply transferring tax burdens
to consumers or non-organised citizens. To evaluate this theoretical framework, I have compiled
an original dataset on business groups and associations for 18 countries in Latin America between
1990 and 2010. This theory uncovers a strong link between the patterns of business coordination
and the feasibility of implementing distributive tax policies. This article also contributes to the
study of business politics beyond the limited sample of developed countries.
Keywords
tax politics, business interest groups, Latin America
Accepted: 30 September 2015
The increasing volatility of international financial markets and international commodity
prices has substantially raised the level of fiscal stress for governments in developed and
developing countries. Central governments not only face growing political pressures to
raise social expenditure, but they also have limited policy tools available to manage fiscal
policy. Access to external debt is more restricted than some decades ago,1 and the use of
monetary policy to fund governments is now less common.2 Some governments have
access to extraordinary natural resources revenues; however, the increasing volatility of
international oil prices can call into question the sustainability of a fiscal policy based on
oil revenues.3 Consequently, tax reforms are unavoidably the main ingredient of any fis-
cal deficit reduction plan.
The comparative politics literature has investigated the politics of tax reform by focus-
ing on the role of political and economic institutions (Hallerberg et al., 2009; Persson and
Institute of the Americas, University College London, London, UK
Corresponding author:
Néstor Castañeda, Institute of the Americas, University College London, 51 Gordon Square, London WC1H
0PN, UK.
Email: n.castaneda@ucl.ac.uk
616287PSX0010.1177/0032321715616287Political StudiesCastañeda
research-article2016
Article
Castañeda 123
Tabellini, 2003; Poterba and Von Hagen, 1999; Rodden, 2006), the government’s ability to
capitalise crisis environments (Alesina and Drazen. 1991; Alt et al., 2010; Fisher, 2009;
Mahon, 2004), and the bargaining between agenda setters and legislators (Profeta and
Scabrosetti, 2008; Richter et al., 2009; Schick, 1980). Yet this work does not provide a full
account of the variation in the implementation of revenue-raising tax reforms because it
overlooks the role of the most important actors in tax policy-making: business interest
groups. Firms and business organisations play an obvious and central role in fiscal policy-
making, but their role has not been systematically analysed, especially in the context of
developing countries (Smith et al., 2014). Scholars and pundits simply argue that money
buys influence, or that business interest groups have hijacked democratic governments.
However, there have been very few attempts to understand the mechanisms that effectively
translate business influence into specific policy outcomes or to understand under which
particular conditions business interests are more successful than politicians and techno-
crats in shaping policies (Baumgartner et al., 2009; Culpepper, 2011; Fairfield, 2015).
In contrast, this article highlights the importance of business interest groups for the
analysis of tax policy-making. In particular, I argue that cross-country variation in tax
revenues mainly depends on the interaction between the policy preferences of the agenda
setter (presidents and/or finance ministers) and the domestic patterns of business coordi-
nation. I develop a theory that builds from the existing literature on varieties of capitalism
and business interest groups (Culpepper, 2011; Hall and Soskice, 2001; Martin and
Swank, 2004; Schneider, 2013) and incorporates the patterns of business coordination as
a crucial factor in explaining fiscal policy. I argue that centralised coordination and policy
integration jointly make business interest groups more effective for lobbying activities
and, consequently, more influential in shaping tax policy.
The rationale of the theory is straightforward. Agenda setters (presidents and/or finance
ministers) and business interest groups have distinctive preferences over types of taxation
(direct vs indirect), tax rates (corporate, income, value-added taxes, etc.), and special pro-
visions (i.e. tax deduction, tax credits). For the agenda setters, these preferences are usu-
ally partisan-oriented or simply depend on the characteristics of the government coalition.
For example, left-wing governments usually extract higher levels of tax revenues to
finance distributive social programmes, and right-wing governments collect fewer taxes in
order to promote private investment and stimulate economic growth (Boix, 1998: 11).
Meanwhile, business usually prefers low corporate tax rates, and its preferences
about personal income and value-added taxes are generally more ambiguous. These
preferences are usually subordinated to their market strategies and their sources of com-
parative advantage regarding potential competitors (Culpepper, 2011; Schneider, 2013).
Consequently, under some circumstances, business will lobby against increasing per-
sonal income tax, but under other circumstances, it would support increases in personal
income tax.
These actors’ preferences are obviously consequential for tax policy, but only under
particular institutional and organisational settings. Consequently, I argue that revenue-
raising tax reforms are most likely to occur if there is discord between business and
agenda setters’ preferences, and the resulting tax policy will depend on business groups’
organisational capacity (varying from centralised to decentralised coordination) to curtail
the effect of the agenda setters’ policy preferences.
I test this argument for a sample of Latin American countries between 1990 and 2010.
This is a very relevant sample for two reasons. First, the countries selected are all middle-
income, allowing for variance in the level of economic growth, economic diversification,
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