BERGMAN - Chile y Argentina

Tax Reforms and Tax Compliance: The Divergent Paths of Chile and Argentina
Author(s): Marcelo S. Bergman

Source: Journal of Latin American Studies , Aug., 2003, Vol. 35, No. 3 (Aug., 2003), pp.
593-624
Published by: Cambridge University Press
Stable URL: https://www.jstor.org/stable/3875313
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J Lat. Amer. Stud. 35, 593-624 z200oo3 Cambridge University Press 593
DOI: Io.iOI7/Soo222i6Xo3oo685o Printed in the United Kingdom
Tax Reforms and Tax Compliance:

The Divergent Paths of Chile
and Argentina*
MARCELO S. BERGMAN
Abstract. This article compares the effects of tax reform on tax com
Argentina and Chile. After constructing three different comparative inde
compliance, it proposes a comprehensive approach, which includes poli
omic and sociological explanations to address the different behaviour of t
each country. It concludes that Chile was able to enhance better tax
because it has implemented a permanent, stable and rational policy tha
for the development of an effective tax administration - a process n
accomplished in Argentina. Tax reforms may enhance better compliance
they reverse the entrenched evasion strategies of the taxpayers.
Introduction
Why do states differ in their abilities to collect taxes? What must govern-
ments do in order to secure higher levels of tax revenues ?
This article examines the success of Chile and the failure of Argentina in
collecting taxes over the last decades. By contrasting the two experiences, it
demonstrates that a successful tax policy relies to a significant extent on the
population's degree of voluntary tax compliance. Since Chile has been able to
enhance higher degrees of tax compliance by its citizens over an extended
period of time, it has succeeded in raising significant tax revenues. In com-
parison, Argentina, which also launched major tax reforms that rendered
initially good results, failed in the long run to maintain sustainable tax col-
lection.
Tax compliance is, to a large extent, a function of state capacities to collect

taxes.' Voluntary compliance is rarely the outcome of altruistic behaviour;
rather tax compliance is the result of policies that rely on deterrence, that is,
Marcelo S. Bergman is a lecturer in the Judicial Studies Division of the Centro de

Investigaci6n y Docencia Econ6micas (CIDE), Mexico.
* The author is grateful for the comments of two anonymous JLAS reviewers.
1 M. Levi, On Rule and Revenue (Berkeley, 1988), and C. Tilly, Coercion, Capital and European
States (Massachusetts, 1990).

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594 Marcelo S. Bergman
the ability of tax administration (TA) and other state organisations effectively
to detect and punish citizens who disobey the tax laws.2
During recent decades tax evasion has been modelled as taxpayers'
rational response to their subjective appreciations of the probability of detec-
tion and sanction.3 These models, however, failed to demonstrate how these
subjective appreciations are formed. The social environment in which people
act is crucial to determining the survival, spread or demise of social and
economic behaviour.4 The differences between the environment in Chile and
Argentina enables tax enforcement to be more effective in the former than
the latter.
Deterrence is a function of government's ability to forge credible threats.

Without an efficient tax agency, tax revenues will diminish and all forms of
tax non-compliance5 will rapidly grow.6 In order to improve the level of tax
compliance governments therefore need to develop an effective institutional
response to the problem of tax evasion.
Chile and Argentina differed greatly in their ability to generate compliance.
Tax evasion in Argentina is roughly double that in Chile. However, the tax
structure and tax rates, as well as the organisation of the tax administration
are not significantly different to account for such large disparity in com-
pliance. Both Chile's tax agency (SII - Servicios de Impuestos Internos) and
Argentina's counterpart (DGI - Direcci6n General Impositiva) are moder-
ately efficient. Undoubtedly, other factors beyond tax administration affect
the level of compliance.
Tax compliance is a function of state capacities as long as those capacities
are persistent, continually developed, and consistently implemented over an
extended period in order to offset entrenched practices of evasion. The
success of the Chilean tax administration and the tax policies implemented
over the last 25 years created a 'tax environment' under which citizens
2 M. Allingham and A. Sandmo, 'Income Tax Evasion: A Theoretical Analysis,' Journal of

Public Economics, vol. I (1972), pp. 323-38; C. Clotfelter, 'Tax Evasion and Tax Rates: An
Analysis of Individual Returns,' Review of Economics and Statistics, vol. 65 (1983), PP. 363-73 ;
and F. Cowell, Cheating the Government: The Economics of Tax Evasion (Massachusetts, i 990).
3 C. Tittle, Sanctions and Social Deviance (New York, I980); R. Paternoster, 'The Deterrent
Effect of the Perceived Certainty of Punishment: A Review of the Evidence and Issues,'
Justice Quarterly 4 (1987), pp. I O-46. S. Klepper and D. Nagin, 'Tax Compliance and
Perceptions of Risks of Detection and Criminal Prosecution,' Law and Soiety Review, vol. 23
(1989), pp. 209-40.
4 C. Bicchieri, 'Learning to Cooperate,' in C. Bicchieri, R. Jeffrey and B. Skyrms, The
Dynamics of Norms (London, 1997).
5 There are several forms of tax non-compliance. The most commonly recognised are tax
evasion, tax avoidance and tax arrears.
6 R. Bird, Tax Policy and Economic Development (Baltimore, I992) and B. Erard, 'The Influence
of Tax audits on reporting Behavior,' in J. Slemrod, Why People Pay Taxes: Tax Compliance
and Enforcement (Ann Arbor, I992).

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Tax Reforms and Tax Compliance 595
internalised compliance. Conversely, Argentina's tax capacities have never

been consolidated. Therefore, the perception of risk of Argentine taxpayers
has not increased steadily, leading, at best, to sparing and moderate successes
that promptly vanished.
I argue that compliance is a function of government's ability to develop
appropriate institutions capable of posing a permanent credible threat.
This article is structured as follows: section two discusses measures of
tax compliance. Section three describes the different results of tax reforms
in these two countries. Section four examines the problem of compliance in
both countries from economic, political, sociological and cultural perspec-
tives. Section five integrates the different explanations and analyses the
creation of an effective TA capable of achieving a credible deterrent effect.
The last section summarises the findings.
Tax compliance in Chile andArgentina
In order to assess the efficacy of tax agencies, a uniform measure of tax

collection needs to be employed. Some studies estimate the state's taxing
capacities by comparing the total tax burden as a percentage of GDP.
However, this indicator is potentially misleading because does not portray
distortions and differences in the tax structure of each country. For instance,
Chile's total tax revenue as percentage of GDP is not from social security
taxes, which were eliminated in i98i and replaced by individual pension
accounts. In contrast Argentina's mixed social security funded model, in-
troduced in 1993, did not entirely replace the retirement and payroll taxes of
the old state pension system.7
The total tax burden for Chile in 1992 was 17.5 per cent of its GDP
whereas for Argentina it was 16.4 per cent of GDP. However, social security
taxes comprised 4.8 per cent of Argentina's tax collections, while these are
absent from Chile's total tax burden.
Table I compares the share of each tax as a percentage of the GDP for
199z and 1997.8 An in-depth examination of each country's success in col-
lecting taxes requires a closer analysis of tax compliance. Furthermore, any
assessment of tax capacities and tax compliance in Chile and Argentina
7 A. Arenas de Mesa and F. Bertranau, 'Learning from Social Security Reforms: Two Dif-
ferent Cases, Chile and Argentina' World Development, vol. 25 (1997), PP. 329-48.
8 Information was calculated from two sources: For Chile, see 0. Larrafiaga, 'Casos de exito
en la politica fiscal en Chile, 1980-1993,' CEPAL Serie Politica Fiscal No. 67 (Santiago de
Chile, i995); and for Argentina, V. Durin and J. C. Gomez Sabaini, 'Lecciones sobre
reformas fiscales en Argentina: 1990-1993,' CEPAL, Serie Politica Fiscal no. 68 (Santiago
de Chile, 1995). For 1996 the total central government tax receipts for Argentina was
14.8 per cent and for Chile I7.5 per cent.

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Table i. Tax Revenues as a Percentage of GDP I992 and i997

Chile Argentina
1992 1997 1992 1997
Value Added Tax 8.5 9.16 5.89 6.2

Income Tax 4-2 4.17 1.6* 2.75
International Trade 2.01 1.91 0.95 0.9
Excise Taxes 1.9 1.87 2.77** 1.84
* For Argentina income tax and property tax a
** It includes gas tax for Argentina.
should be based on a systematic comparison

generates.
For both countries VAT (Value Added Tax) i
system.9 In i992 Chile's VAT revenues repr
tax revenues and 8.5 per cent of GDP, these
50.9 per cent and 9.16 per cent respectively.10
3 5.9 per cent of total tax revenues and 5.9 per
for 1997 it was 35.7 per cent of total revenu
Although the importance of income tax incr
Argentina it did not play such central role in t
Measuring tax compliance proved a difficu
reliable measures have not been fully developed
Three different measurements of compliance a
A) VATproductivity index (P/VAT)
One indicator of compliance is 'VAT productivity' (see Table 2). The pro-
ductivity of a tax effectively sheds light on the magnitude of compliance.
PVAT measures the yield of each percentage point of the tax rate as a share
9 Only during a brief period in the late i98os did excise taxes surpass the revenues generated
by VAT in Argentina.
10 Servicio de Impuestos Internos (SII) Ingresos tributarios anuales de i992 a 2ooo (2ooi).
11 Durin and Gomez Sabaini, 'Lecciones sobre reformas fiscales en Argentina: 1990-1993,'
CEPAL, Serie Polituca Fiscal no. 68 (Santiago de Chile, 1995).
12 AFIP, Estudios sobre cumplimiento tributario (Buenos Aires, 1998).
13 The most comprehensive and well-studied tax compliance measure has been the TCMP
(Tax Compliance Measurement Programme) developed in the United States. It estimates
compliance, for both individuals and businesses based on tax audit results of a large ran-
domly selected sample from tax returns. A TCMP, which provides useful and rich data, has
not yet been used in any Latin American country. The TCMP is a good estimator, mainly
for income tax, which, in both Chile and Argentina, does not constitute the main source of
tax revenues. The cost of a TCMP type of programme for VAT is extremely expensive,
since an in-depth audit of VAT requires a thorough inspection of inventories that must be
conducted on the premises of the firms. This and other considerations rule out a TCMP-
type estimate of compliance.

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Table 2. PVAT for Argentina and Chile

Argentina Chile Argentina Chile
1992 1992 1996 1996
Tax Base* 48 per cent 56 per cent 5z/% 550%
Productivity VAT 33 per cent 49 per cent 32% 51%
* As percentage of GDP.
of GDP.14 Since the tax base and the tax rates have a strong effect
productivity level for compliance purposes a comparison of PVAT bet
countries must be based on compatible tax bases and tax rates. Tho
indeed the cases of Argentina and Chile. In Chile the productivity rate w
per cent, whereas in Argentina PVAT reached only 33 per cent. In
words, for Chile every point of the VAT rate generated revenues close to
per cent of its GDP, while in Argentina only 0. 33 of every percentage p
of GDP is yielded by every VAT point. This indicates that for every poin
VAT rate, Chile's tax agency collects almost 50 per cent more than
counterpart in Argentina (49 per cent against 33 per cent), suggest
higher evasion of the latter. Chile's tax base is slightly higher, which
tributes to increase productivity, however, this difference is minima
than seven per cent difference in tax base). Therefore the sizes of the ta
are compatible but the yields differ markedly.
Tax rates do not appear to have a major impact on this or any ot
compliance coefficients. Throughout most of the period under study
rates changed in both countries, but they remained between 16 per cent
18 per cent." Thus, VAT rates in these two countries do not explain
differences in tax compliance.
B) Compliance Coefficent (CC)
Several studies measure VAT compliance comparing the gap generate

tween expected and actual tax revenues. This index is generally used b
IMF.16 It estimates potential tax revenues by calculating the total tax
from national accounts. Once the base is estimated, it is multiplied by th
rates. This produces the potential or 'expected' VAT revenues to be
lected. The difference between potential and actual revenues generate
14 J. C. Gomez Sabaini, Tax Policy Director 1984-1987. Interview held in Bueno

July 16, 1995.
15 In Argentina VAT reached z1 per cent by mid-1995 in order to alleviate the fiscal
created by the 'Tequila Effect'.
16 For further reference, plus a review of the methodology most commonly used by th
see V. Tanzi and P. Shome, 'Tax Evasion: Causes, Estimation, Methods and Pen
A Focus on Latin America,' CEPAL Serie Politica Fiscal No. 38 (Santiago de Chile, 1

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tax gap.1 This tax compliance coefficient must be accepted with certain
reservations because the tax base is calculated from national accounts, which,
at times, are not entirely accurate,18 or occasionally their reviews are not
updated for many years.19 Therefore any tax compliance coefficient rep-
resents an approximation of the differences between potential and current
revenue.
Figure i plots the tax compliance coefficients for Chile

a span of ten years. The average VAT compliance coeff
in this period was 54.26 per cent while Chile's average
per cent.
Tax compliance for VAT in Chile vastly exceeds c
Argentina, confirming the fact that Chile has a much low
C) Index of tax ageng effdiengy or net voluntary compliance
An accurate estimate of real state capadties to enhance volu

must exclude taxes collected either when there is a gen
tive to pay them or when taxpayers lack a real choic
reliable estimate of voluntary tax compliance can be ca
the effect of VAT exports reimbursements and VAT
from imports.
Exporters have incentives to report accurately (and som
report) in order to get reimbursed for the exports exem
assumed that there is no significant VAT evasion in
addition, import tax collections are relatively easy to adm
quently hard to evade. It is presumed that the vast major
are indeed reported.20
17 Many models estimate compliance coefficients. They are based on

base calculated from national accounts. Since tax laws differ
necessary to calculate the taxable portion of each country's GDP.
done annually because of the uninterrupted changes in the legislatio
tax base. Once the tax base is estimated, it is multiplied by the tax
are always required due to different rate structures, etc.). This
theoretical) VAT. The actual revenues are a percentage of the po
the potential VAT may also stem from the inclusion or exclusio
generally exempted from this tax. 18 Bird, Tax Policy and Econo
19 J. Friedman, Estudio de la evasidn en el IVA (Santiago de Chile,
maci6n de la Evasi6n en el Impuesto al Valor Agregado,' Serie Doc
Universidad de Chile (Santiago de Chile, i991).
20 Some importers underreport purchases in order to reduce VAT
the national accounts use registered foreign trade activity. As m
calculated from national accounts. In this sense, the import VAT
the estimation of net compliance.

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90
80 9
70,
60 , _ /
50.
40
or
30
89 90 91 92 93 94 95 96 97 98 99
r 1
-I - -
Fig. i. C
I introd
export r
as subtr
in custo
This ind
reported
Based on
clear: wh
21 The ass
of entry.
(1992-199
theless, as
accounts,
affect, at
el valor de
(Santiago
22 In addi
measure c
enhanced
not comp
one of ev
foreign t

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6oo Marcelo S. Bergman
70,
60
50 .
30I90
I -91 92 93 94 95 96 97 98
E_ _ Chile -g - Argentina
Fig. 2. Net Compliance Coeffiient.
Chile's SII had been able to increase its revenue enhancing capacity. The
'Tequila effect' in 1995 (the spillover of the Mexican economic crisis) may
only partly explain the increase in tax non-compliance in Argentina, since
after 1993 this index was already showing a decreasing trend of compliance,
more than two years prior to the effects of the Mexican financial crisis.
In sum, all three indicators suggest that tax compliance in Chile is much
higher than in Argentina. Although in 1992-1993 Argentina enjoyed
lower rates of tax evasion, this success proved short-lived. In contrast, Chile
demonstrated a trend of improving tax compliance. The disparate results
of tax reforms must be explained from a comprehensive perspective,
which considers macroeconomic, political, administrative, and sociological
variables.
A tale of two countries
Accounting for tax compliance
Tax Compliance correlates with deterrence. Although friendly economic

environments create positive incentives for better compliance, taxpayers
will free ride and evade taxes if they perceive that risks of detection and
punishment are low. In a 1997 survey, Argentine taxpayers estimated the

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Tax Reforms and Tax Compliance 6oi
risk of detection as very low. Some 82 per cent of respondents reported

willingness to take risks and evade VAT in a standard transaction of
$io,ooo.23 On the other hand, in a 1998 survey in Chile 75 per cent of tax-
payers estimated that a standard tax evasion is extremely risky.24 Clearly,
Argentina's failure to improve compliance is associated with its failure to
deter its taxpayers.
In order to eradicate tax evasion, in the 198os and 3990s scholars argued in
favour of reforms of an archaic tax system.25 Others emphasised the need to
revamp the administrative capacities,26 while some scholars argued in favour
of developing the necessary political conditions for the measures to be car-
ried out successfully.27 Strong tax enforcement became a key to enhancing
compliance; however, it was unclear how to best achieve this goal. Whether
to change the tax system, to improve political capacities, or to develop a
strong administration.
The ability of states to raise revenues and improve compliance depends on
their capacity to 'craft deterrence.' However, the central problem is how
states can develop these institutional capacities. The way governments
overcome the economic, political, social and administrative constraints
determines the success of establishing an effective tax administration.
From the mid 1970s onwards Chile and Argentina engaged in root-and-
branch tax reforms in order to improve collection. In 197 5 both countries
replaced the old sales taxes with VAT. They introduced new and similar
mechanisms for inflationary adjustments. After 1976 they reformed their
income taxes and lowered marginal rates.
Both countries modernised their tax agencies. By the end of the decade
they had substantially improved their collection schemes, their audits and
inspections procedures, and their punitive capacity.28 Although similar
23 AFIP, Estudios Sobre Cumplimiento Tributario.

24 Mori, Investigacion del comportamiento de los contribuyentes frente a la obligacidn tributaria. SII.,
(Santiago de Chile, 1998).
25 A. Harberger, 'Lessons of Tax Reform from the Experiences of Uruguay, Indonesia and
Chile,' in M. Gillis, Tax Reform in Developing Countries (Durham, NC, 1989); and A. Tait,
Value-Added Tax: International Practice and Problems (Washington, DC, 1988).
26 Bird, Tax Poligy and Economic Development; M. Cassanegra de Jantscher, 'Inflation Adjust-
ment in Chile,'in R. Bird and 0. Oldman, Taxation in Developing Countries (Baltimore, 1990);
Das-Gupta, A. and D. Mookherjee, Incentives and Institutional Reform in Tax Administration:
An Analysis of Developing Country Experience (Delhi, 1998); and F. Durand and R. Thorp,
'Reforming the State: A study of the Peruvian Tax Reform,' Oxford Developmental Studies,
vol. 2z6 (998), pp. 133-5 i.
27 M. Gillis, 'Tax reform: Lessons from Postwar Experience in Developing Nations,' in
Gillis, Tax Reform in Developing Countries; and Bird, Tax Poliy and Economic Development.
28 FIEL, El sistema impositivo argentino (Buenos Aires, 1991);J. Arellano and M. Marfin, '25
Afios de Politica Fiscal en Chile,' Coleccidn Estudios CIEPIAN, no. 21 (1987), pp. 129-62;

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reforms in Chile and Argentina were launched and implemented under ex-
clusionary military regimes they yielded different long-term results. This
section examines the major reforms in each country and their impact on
developing an effective deterrence.
Argentina
Over the last 25 years, in spite of short-lived success (1979-I980, 198 5-1986,
199 -i993) Argentina has been unable to sustain a stable tax policy and an
efficient administration capable of deterring tax evasion. The state's tax
agency was weak, tax returns remained overwhelmingly unchecked through-
out most of this period,"9 there was no unified code for tax registration
systems, the mechanisms for punishing tax fraud and evasion were outdated
and inefficient, and even the tax court adjudicated on less than i o per cent of
cases filed.30 Training for tax auditors declined, and their detection capabilities
were limited due to a lack of systematic third party systematic reporting. As
one high-ranking DGI official said, 'tax auditors were completely blind,
they could only detect what taxpayers were willing to show them'.31
Therefore, during the i980s taxpayers lacked real incentives to pay
taxes since the probability for being detected and punished was extremely
low. Non-compliance rates averaged 60o per cent and sometimes exceeded
75 per cent. Taxpayers accurately perceived the favourable odds of cheating
the government. VAT revenues were mainly collected in customs, in the
public sector, and by large corporations that have accounting and managerial
systems more favourable to compliance.32
and M. Marcel, 'Diez afios del IVA en Chile,' Coleccidn Estudios CIEPILAN, no. 19 (1986)
pp. 88-i34.
29 J.C. Gomez Sabaini, Tax Policy Director 1984-1987. Interview held in Buenos Aires or
16 July 1995.
30 Reported in a personal interview held in Buenos Aires on 27 June 1995 with Pedro Pagani
former national director of the Fiscal Tribunal (Tax Court) between 1985 and 1989.
31 Interview with Horacio Castagnola, director of DGI's audit division DGI. Buenos Aire,
3 July 1996. In February 2oo2 Castagnola became the head of the DGI.
32 Large corporations lack the incentive to evade VAT by misreporting sales. In order tc
under-report sales they require a very complex double accounting system, which is also
considered a fraud punishable under the penal code. In some cases, however, large
companies over-reported VAT credits in order to reduce VAT liabilities, using comple)
accounting techniques. Nonetheless, this is not overwhelmingly practiced. Large companie,
reduce liabilities, generally in the income tax category, by relying on sophisticated ta)
avoidance procedures. Therefore, not many VAT under-reports have been found in large
companies' audits in Chile or in Argentina. In Chile, during 1996, only 9 per cent of tota
additional assessed taxes by audits of large corporations were VAT related. In Argentin,
for i997 this was only 7 per cent.

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Throughout this period new tax initiatives overlooked the DGI's admin-
istrative limitations. During the I98os these policies included multiple tax
rates for different economic activities, continuous changes in the tax base
and provided tax credits for 'productive' activities that were rarely inspected,
thus conspiring with the self-enforced nature of VAT.33 Tax credits launched
to enhance economic growth helped to reinforce a weak state. The govern-
ment was incapable of monitoring and effectively controlling these tax
credits and thus became hostage to corporate lobbying, particularly during
the severe economic crisis of the I980s. This became a major difference
between Argentina and Chile, as Chile has effectively avoided using VAT
as a direct incentive for growth.
The most successful tax reform in Argentina was introduced in 1990-
1992, a reform which for the first time aggressively tackled the administrative
aspect of tax collection. Some of the most important innovations included:
the introduction and strict enforcement of a unified taxpayers' registration
code; the simplification of many tax returns; the legislation of new penal
statutes to prosecute tax evasion; massive computerisation of all tax pro-
cedures and information; and the addition of more than oo00,000ooo new names
to a category of closely monitored major taxpayers.34
The new administration reduced the countless exemptions and tax in-
centives, which during the 1970s and I98os, had weakened the state's
capacity to enforce tax laws and generated tax loopholes which were for tax
administration officials to detect.35
As shown by the indexes in section two (particularly the NVC), the initial
effect of these and other measures was significant. For the first - and per-
haps the only - time in Argentine history VAT voluntary compliance ex-
ceeded 50o per cent. However, these reforms failed to achieve sustained
improvements, as the decline of tax compliance after 1993 indicates. Why was
tax compliance reversed? Why did tax evasion return to the historic pattern?
Tax compliance is the result of taxpayers' subjective perception of the risk
of detection and punishment. Therefore, it must be assumed that taxpayers'
risk perception diminished after 1993, which in turn lowered the taxpayers'
risk aversion and increased the level of evasion. Presumably taxpayers per-
ceived that non-compliance was safer in 1994 than in 1992. Since there were
no significant changes in tax administration between 1993 and 1994 which
33 A. Tait, Value-Added Tax: International Practice and Problems (Washington, DC, 1988).
34 This was the Sistema Dosmil (System Two Thousand), originally designed to monitor the
tax returns of the two thousand major contributors immediately below the category of
leading major national major corporations (today approximately 1,700). The Sistema Dos-
mil was later expanded to include each region's major two thousand taxpayers. Today they
account for more than 0oo,ooo. The degree of monitoring, however, is not as thorough.
5 FIEL, El sistema impositivo argentino (Buenos Aires, 99i).

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could account for 'triggering' a reversing trend in compliance,36 and no

recession or other economic factors can explain the reversal, the trend
towards evasion must be explored at the micro level.
A more plausible explanation is that the effect of the 1991-1993 period
was short-lived. The reforms of 1990-1992 and the DGI's activism triggered
greater tax observance by traditionally non-compliant taxpayers. They re-
alised that in 1991 the rules of the game had changed, forcing them to adjust
as risk perception increased substantially. The threat of sanctions became
credible; for the first time DGI agents shut down more than 5,000 busi-
nesses. More audits were launched and several formal aspects of registration
and invoicing were monitored. By 1993, however, taxpayers slowly but
steadily slipped 'back to normality', that is to the entrenched attitudes of
non-compliance. Taxpayers realised that enforcement lacked real teeth.
Chile
The collection of taxes in Chile is characterised by stability and growth.

Despite some fluctuations following the 1982 economic crisis, tax revenues
in Chile increased steadily after 1974.
Three major reforms were launched following the overthrow of Allende's
government. The first after the coup in 1974-1975, the second reform in
1984 in the midst of a recession, and the third after the inauguration of
the civilian government in 1990. These reforms, particularly the first, were
comprehensive, although their implementation was incremental. Policies
indeed changed, but enforcement was gradual.
The 1974-75 tax reform was engineered by the 'Chicago Boys'. The pillar
of the reforms was the replacement of the old sales tax by VAT and the
adjustment of income tax marginal rates in order to reduce evasion and
generate more private savings. Reforms, particularly, focused on dismantling
the extensive programmes of tax incentives and exemptions, considered
both highly distorting of economic efficiency and a perfect opportunity for
tax evasion. As in Argentina, the promotional exemptions under populist
governments created countless tax loopholes exploited beyond the regulat-
ory framework of the state.37
36 On the contrary, more than ,500oo new tax agents were effectively incorporated in 1993.
37 Nonetheless, many exemptions were left intact or only slightly adjusted (for a complete list,
see M. Marcel, 'Diez afios del IVA en Chile,' Coleccio'n Estudios CIEPLANNo. 19 (Santiago
de Chile, 1986), pp. 88- 34. The literature on indirect taxation in developing countries
emphasise the need to eliminate tax incentives. However, the fact that Chile has been able
to achieve greater compliance with less but still numerous tax exemptions, indicates that
tax incentives and exemptions on VAT is not a crucial independent variable in explaining
compliance.

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Tax Reforms and Tax Compliance 6o5
The 1974 reforms also dealt successfully with inflation distortions, both in
terms of the burden they create on taxpayers (VAT credits) and on the
depleted revenues of the state. In contrast, Argentina failed to successfully
establish a reliable indexation system to offset the pervasive effects of in-
flation over tax revenues. By the I96os Chile had already launched a modern
system of indexation, which was further reformed in 1974 and has changed
very little.38 Since changes implied complexities that could have created new
inequities, the existing system of indexation was preferred because it had
proved to be administratively effective. As the Chilean case indicates shows,
a good tax policy means more than reasonable laws; it is one that allows for
good administrative performance.
The efficiency-driven reforms proposed by the ticnicos were partially ac-
cepted by the Pinochet regime. The pillar of tax uniformity, which VAT
requires in order to reduce loopholes and increase regulatory and audit ca-
pacity on the part of the tax agency, was introduced with minor exemptions
(sales of the agricultural sector continued to benefit from tax incentives). The
new regime eliminated special treatment for groups, which due to political
and other considerations had received tax benefits in the past.39 In other
words, the drive of the new tax administration was to enhance horizontal tax
equity.40
The success of new tax policies often relies on favourable political con-
stellations. During the i970s the Pinochet regime was not compelled to deal
with any serious distributional issues. The rejection of Allende by large seg-
ments of society and by the markets provided the new regime with broader
support than that enjoyed by the Argentine military regime. The strength of
the Chilean right also provided long-term and stable support.41 This led to a
more 'insulated' government in Chile, less dependent on the dictates of
powerful economic groups.42 The new regime in Chile achieved higher de-
grees of autonomy, while the Argentine military regime failed to consolidate.
A more autonomous government enjoyed higher leverage when it came to
launching drastic tax policies with less public resistance. In sum, tax reforms
in Chile were implemented by a strong government that gave full support to
its implementation. It has insulated them from predatory or veto powers
from social actors.
The second Chilean reform of 1984 dealt principally with income tax.
Aside from periodic adjustments of VAT rates and the tax base in order to
38 M. Cassanegra de Jantscher, 'Inflation Adjustment in Chile,' in Bird and Oldman, Taxation

in Developing Countries.
39 W. Ascher, 'Risks, Politics and Tax Reform: Lessons from Some Latin American Ex-
periences,' in Gillis, Tax Reform in Developing Countries. 40 Gillis, 'Tax reform'.
41 K. Remmer, Military Rule in Latin America (Massachusetts, 1989).
42 J. Martinez and A. Diaz, Chile: The Great Transformation (Washington, DC, 1996).

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reduce fiscal deficits, there were no major shifts between 1974 and 1990 in
the policy and administration of Value Added Tax. As regards taxation, the
major developments were within the SII, which increased its registration and
inspection capacities, significantly improved informational systems, estab-
lished a solid and cohesive professional team of administrators and benefited
from the long-term stability of its leadership. For example, between 197 5 and
1999 a total of five directors headed the SII. In contrast, during the same
period, there were 14 DGI directors in Argentina.43
The third tax reform was launched after the 1990 election and aimed to
increase revenues in order to fight poverty. These reforms were implemented
within a different economic and political environment. However, the Con-
certacidn had incorporated two very important lessons developed during the
Pinochet regime: i) That fiscal discipline is crucial for any economic policy
and z) that it is preferable to have horizontal tax equity than vertical tax
equity.44 In the medium- and long-term, horizontal equity may also contrib-
ute to improving vertical equity. In short, the new administration decided not
to depart from generally prudent tax guidelines which relied on simplicity,
effectiveness and, most importantly, a policy that generated redistribution of
wealth through public spending rather than directly through the tax system.
These policies allowed Chile to achieve greater effectiveness and legitimacy.
After 1993 Chile's index of 'net compliance' (NVC) exceeded 60o per cent and
total VAT tax evasion (CC) decreased to less than 22 per cent. These are
impressive coefficients even for more developed countries. Tax compliance
improved also by Chilean standards. The Concertadcin democratic government
reduced tax evasion and enhanced voluntary compliance with better standards
than the already good performance gained by the previous military regime.
The development of administrative capacities and compliance
The design of a tax administration capable of ensuring that taxpayers con-

form to their legal obligations has not received the necessary attention in the
tax reforms literature. The central agenda for tax reformers to date has been
the elimination of distorted taxation in order to enhance welfare and
43 The difference in professional and managerial stability of the SII and the DGI could be
interpreted merely as a reflection of their respective tax policies' rate of success. It is
intrinsically connected to Chile's economic recovery and the severe economic crisis of
Argentina. However, between 1990 and 1996 there were four different DGI directors at the
time of the most successful tax reform period. Leadership stability is not necessarily a
dependent variable, but to a certain extent a causal factor of tax administration and policy
success.
44 For a comprehensive analysis of the tax policy in the transi

'Taxation and Transition: The Politics of the I990 Chilean Tax
Research Review, vol. 33, 1996, pp. 7-3 i.

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productivity. It was assumed that enforcement would follow. However, as

these cases demonstrate, the success of tax administration does not depend
solely on the rationality of 'enforcement' measures (simplicity, withholding
and assessment policies) but on the capacity to generate a professional and
modern tax agency, capable of fast adjustments to new complex realities. The
development and design of such administration is an organisational as well as
a political endeavour. Why have certain tax administrations become more
effective than others ?
The development of strong tax agencies depends on both professional

capacities and the commitment of political leadership, which result in turn
from an array of incentives and opportunities for policy makers and state
technocrats. For example, existing fiscal deficits and institutional constraints
played a different role in Argentina and Chile. These constraints prompted
the strengthening of the SII and weakened the deterrent capacity of the DGI.
While the initial appearance of the reform was similar in both countries,
their sustainability and the commitment to developing bureaucratic capacities
diverged. The structure of opportunities and the perceived advantage of the
reforms created more incentives for Chilean policy-makers to create a more
efficient tax administration. The new military government viewed the econ-
omic reforms as a means to demonstrate the virtues of the new regime. During
the 1970s Chilean policy-makers fully embraced new financial principles that
included strong fiscal restraints. Tax collection and a strong tax administration
were paramount. In addition, tax enforcement was perceived as another
element of a strong legal framework, which in Chile has a rooted history.
In Argentina the structural weakness of the military regime in the 1970s
and early 1980s, and the lack of substantive support from technocratic,
military and civilian social sectors, reduced the ability of the government to
sustain the development of a strong tax agency. Some years later the 1989
economic crisis renewed the incentives for better tax administration, yet,
after initial successes and the lessening of fiscal pressures in the mid-i99os,
the incentives for a strong and independent DGI diminished. The easy
availability of foreign loans reduced the need for higher internal revenues.
Tax compliance differed greatly in Chile and Argentina because state ca-
pacities were more developed in Chile and fostered a greater compliance
among its taxpayers. Tax reforms launched in 1974-197 5 were incrementally
but effectively executed by a more autonomous tax administration. Tax re-
forms were implemented while Pinochet succeeded in 'Personalising Politi-
cal Power'45 and were able to consolidate his rule.46 Traditional rent-seeking
45 Remmer, Military Rule in Latin America.

46 A. Valenzuela, 'The Military in Power: The Consolidation of One-Man Rule,' in P. Drake
and I. Jaksii, The Struggle for Democracy in Chile. Revised Edition (Lincoln, NE, I995).

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6o8 Marcelo S. Bergman
interests were insulated from policy-making and policy implementation by

the ticnicos. By the late I970s tax administration was highly immune from
corporate and other social pressures. The indexation of tax programmes, the
generalisation of VAT, the reduction of tax exemptions and the exclusion of
VAT incentives were already in place.
These policies increased transparency and greatly improved administrative
efficacy. Chile acquired a greater 'tax autonomy' since tax administrators
were solidly backed by the finance ministry and ultimately by the president
who even allowed his own brother to be investigated for alleged tax evasion.
Felipe Lamarca, who headed the SII between 1978 and 1984, repeatedly
stated that neither the president nor any cabinet minister had interfered with
his pursuit of an even-handed tax administration [Iey pareja].47 Clearly, this
was not the case in Argentina.
The relative SII's administrative autonomy contrasts with DGI's complete
subordination to the weak political elite and the recurring financial crises of
the 1970s and I98os. Tax initiatives were first 'channelled' through the
military and, to a great extent, were successfully resisted by lobbies and
special interest groups. The strong professional cadre of the DGI became
vulnerable to the dictates of the military and later to political appointments
following the restoration of democracy.48 Cyclical economic crises hampered
the development of a stable tax policy. During the 1970s the military
government did not aggressively pursue its fiscal policy, in part because the
economic team did not have the solid backing from an unchallenged
government that the Chicago Boys had in Chile, and partly because business
sectors and the military exerted veto power over tax and spending. There-
fore, the fiscal deficit mounted, putting the DGI on the defensive. Im-
mediate requirements prevailed over medium- and long-term planning.
Thus, the programmes were always implemented to levy quick revenues.
Measures emphasised collection schemes (withholdings, invoicing require-
ments, tax amnesties), instead of the creation of data banks for better
taxpayer surveillance, fiscalisation schemes, programmes to fight internal
corruption, effective bureaucratic training. In sum, solid tax compliance
programmes were never developed because quick revenues were prioritised.
47 Harberger, 'Lessons of Tax Reform'.

48 Although in the late 1970s a new team of professional tax administrators controlled the
DGI (many from graduate programmes in the US), this group lacked full support within
and outside the TA and many managers retired in the early i980s. After the demise of the
military dictatorship, the Radical Party nominated middle cadre administrators who lacked
a solid career track in the civil service or the business world. The demise of the adminis-
tration led to an unprecedented level of corruption. Only in the early 1i990s was a renewed
effort made to modernise the TA, and several of the managers of the late 1970s were
recruited.

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Only during the first Menem presidency were many reforms finally
implemented. The same political conditions that allowed the widespread
approval of the convertibility plan also enabled the strengthening of the DGI
and new tax measures. Yet, this effort was short lived. The structural de-
pendence of the DGI on the political elite and the finance ministry,
the institutional resistances within the organisation, combined with several
political and administrative mistakes,49 cut short the effort to modernise
and transform the DGI into an effective administration. Weak deterrence
followed.
Summary
The reforms in VAT in Chile and Argentina display several similarities and
differences:
Major Similarities
(i) Broadening of tax base and reduction ofpotential loopholes. A VAT base of
50 per cent to 60o per cent of GDP.
(2) Significant reduction of tax exemptions to previously favoured sectors or
corporations.
(3) Significant incorporation of Information Technology.
(4) Unification into a single VAT rate of 15 per cent to I8 per cent range.
(5) Similar penal statutes for tax code violations.
(6) Macroeconomic stability and economic growth during the I990s.
Major Differences
* Inflation. Until 1991 Argentina had higher inflation than Chile over most
of the period under study. This has an effect on tax revenues as higher
inflation depletes tax receipts.50 However, after the drastic reduction of
inflation in the 199os, Argentina still had a higher non-compliance.
49 With the privatisation of the trains and railways in 1993 more than 2,00ooo officials were
transferred and were incorporated to the DGI. In addition the DGI started to collect social
security funds. In 1996 the DGI merged with customs agency. From i2,ooo employees in
1991 it mushroomed to 19,000 five years later. In addition, much emphasis was placed on
crusade campaigns to enhance deterrence. However, these campaigns usually prove short-
lived if permanent programmes of surveillance, control and fiscalisation are not developed.
This is a major difference between Chile and Argentina.
50 Since 1991 inflation has been significantly reduced in Argentina. Therefore, in the 199os,
the Tanzi effect should have depleted more revenues in Chile than in Argentina. But
evidence shows the opposite. During the I990s the effect of price stabilisation in Argentina
generated increased revenues only during the i990-1992 initial phase. In Chile, on the
other hand, even with moderate inflation, revenues and compliance improved throughout
the 1990s.

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61o Marcelo S. Bergman
* Timing of reforms. Many of the reforms were implemented earlier in Chile,

in some cases by o years or more. A plausible hypothesis is that tax
compliance lagged, by many years, behind the effect of the adminis-
trative tax reforms. This may explain Chilean success as compared to
Argentina.
* Administrative Autonomy. Chilean state administration and the state pol-
itical elite enjoyed more independence and therefore the tax agency was
stable and had broader autonomy. This allowed the SII to improve
efficiency and professionalism.
* Macroeconomic conditions in the g9Nos. In spite of 1982-1984 crisis, Chile
enjoyed a more stable and successful macroeconomic environment.
Argentina, despite brief periods of stability, had economic depression
and rampant inflation. Argentina returned to a path of growth in the
199os but tax reforms were not in place as in Chile.
Since there is a significant difference in VAT compliance between Chile and

Argentina, the explanations should be explored through the divergences
rather than the similarities. Two potential variables emerge as plausible: first,
tax administration autonomy and professionalism, and second, the timing of
reforms.
In search of an explanation
The success of Chile compared to Argentina is associated with the devel-

opment of an efficient tax administration that was able to pose a credible
threat to taxpayers. The development of this institutional capacity resulted
from addressing economic, political, and sociological variables. This section
examines four alternative explanations to account for the disparities in tax
compliance and suggests rather that each sets of variables contributed in a
particular way to the strengthening or weakening of tax enforcement.
Economic explanations
The great disparity in fiscal performance between Chile and Argentina has
been explained principally with reference to the effect of macroeconomic
variables.51 Starting from the late 197os, and particularly from the mid 198os,
economic reforms in Chile produced a 'miracle' and high levels of growth
that continued well into the 1990s. Under such favourable economic con-
ditions, the level of compliance improved. On the contrary, Argentina's
51 S. Edwards, Criiss y reforma en America Latina (Buenos Aires, 19935) and FIEL, La Reforma
Tributaria en Ameirica Latina (Buenos Aires, 1998).

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failures and economic instability in the 197os and i980s created adverse
conditions for better compliance.
This argument poses several questions. First, Argentina benefited from
mild economic growth in the late 1970s comparable with Chile's expansion;
however, Argentina did not achieve similar improvements in tax collection.
Second, Argentina's crisis during the early 980s was as severe as that of
Chile, but the ability of Chile to generate internal revenues was higher. Third,
and perhaps more importantly, between I991 and 1998 Argentina's GDP
expanded and economic conditions improved (excluding 1995), but tax
compliance stagnated. Thus, a friendly economic environment does not
necessarily correlate with better compliance.
Economic variables are, however, instrumental for the development of an
effective tax system. First, tax policies that rely less on regulation and more
on self-enforcing enhance better compliance. Second, a system that creates
incentives for better allocation of resources and relies on simplicity allows
for easier administration. Finally, consistent rather than shifting economic
policies allow better conditions for tax administration. All these elements
were met in Chile, contributing to better conditions for the development of
effective deterrence.
The political dimension and the limits of tax reform
Over the last 15 years scholars and tax reformers have recognised the sig-
nificant role of the political dimension ;52 however, these studies lack a clear
specification of political variables. Studies suggest that launching tax reforms
requires strong political support, yet they did not address the circumstances
under which these political capacities can develop in order to overcome
political constraints. In short, they lack an in-depth analysis of the feasibility
of implementing well-designed reforms.
'Crafting deterrence' does not depend solely on the willingness of the elite
and the professionalism of the civil service, but also on the interplay of
political and social forces that shape the capacity of state agencies to over-
come resilience and institutional resistances to modernise.
The initiation of reforms is explained by several interconnected hypothe-

ses. First, the severe crisis of the 198os created incentives for the develop-
ment of more effective policies of taxation. Paradoxically, the so-called 'lost
decade' (for its negative effect on economic growth) was recognised as a
52 During the I 980s and early I990s many volumes and articles were published on tax reforms
in developing countries. For a good summary of the salient issues, see Bird and Oldman,
Taxation in Developing Countries; Bird, Tax Poli~y and Economic Development; Gillis, 'Tax Re-
form'; M. Gillis et al., Value-Added Taxation in Development Countries (Washington, DC,
1990).

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'gained decade'53 [la decada ganada] for tax reformers. Second, a new pol-
itical learning emerged from the debt crisis. In contrast to the previous
populist and heterodox periods, policy makers agreed that macroeconomic
stability could only be achieved by sound fiscal policies and the new econ-
omic programmes thus resorted to curtailing social spending and raising new
revenues. Third, the depth of the crisis was the engine for tax reform. The
deeper the financial crisis was, the easier for governments to carry out root-
and-branch changes.54 This hypothesis finds initial support in some Latin
America cases. The major reforms in Bolivia in 1986, Peru in I991 and
Argentina in 1990 responded to out-of-control inflationary spirals. However,
tax reforms in Mexico, Colombia and Chile were implemented under less
extenuating economic constraints. In sum, the success of a new tax policy is
based on: i) the ability of political elites to carry them out, and additionally
2) the particular political configuration of each country.55 (The social and
political conditions were 'ripe' for major tax reforms in Bolivia, Peru and
Argentina only after major economic collapses had exhausted all other
alternatives. On the contrary, in cases like Chile and Mexico, the ruling elite
were able to gather enough political support to impose its new agenda due to
their inherent capacity.56
Fourth, new political conditions in many Latin American countries57
elicited the development of a new social consensus about the need for major
reforms. This new political learning implied the acceptance of a less active
but more autonomous state, less subject to 'predation' from different sec-
tors.58 An autonomous state meant, first and foremost, a state able to tax.
53 See Carlos Silvani (1996) who, as a senior IMF tax advisor, participated and monitored
many of the reforms carried out in Latin America. He also became the head of Argentina's
tax agency in 1996.
54 R. Bird, 'Tax Reform in Latin America: A Review of Some Recent Experience,' Latin
American Research Review 27 (1992), pp. 7-36; and F. Durand and R. Thorp, 'Reforming the
State: A study of the Peruvian Tax Reform,' Oxford Developmental Studies, vol. 26 (1998),
PP. '33-51.
55 S. Berensztein, 'Rebuilding State Capacities in Contemporary Latin America: The Politics
of Taxation in Argentina and Mexico,' Working Paper no. 48 Universidad Torcuato Di Tella
(Buenos Aires, 1995) and R. Bird, 'Tax Reform in Latin America: A Review of Some
Recent Experience,' Latin American Research Review 27 (1992), pp. 7-36.
56 C. Elizondo, 'The Politics of Tax reform in Latin America,' Divisidn de Estudios Politicos #2,
CIDE (Mexico, 1995); and Martinez and Diaz, Chile: The Great Transformation.
57 C. Acufia, La nueva matrizpolitica arTentina. 'Introduction' (Buenos Aires, 199 5) ; M. Cavarozzi,

'Politics: A Key for the Long Term in South America,' in W. Smith, C. Acufia and E.
Gamarra, Latin American Political Economy in the Age of Neoliberal Reform (New Jersey, 1994);
and A. Lijphart and C. Waisman, 'The Design of Democracies and Markets: Generalizing
Across Regions,' in A. Lijphart and C. Waisman, Institutional Design of New Democracie,
(Boulder, 1996).
58 S. Haggard and R. Kaufman, The Political Economy of Democratic Transitions (New Jersey,
1995).

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These hypotheses, however, addressed the first stage of tax reforms,

namely, the launching of policies to overhaul an archaic tax system. Although
the initiation of tax reforms required some domestic support, the effect of
such support should be measured in the context of broader sets of factors
such as structural conditions, institutional constraints and economic cir-
cumstances.59
I argue that the success of tax reforms lies in the ability of governments to
sustain them over time and build a strong and autonomous tax adminis-
tration capable of deterring tax evaders. The perceived severity of the pre-
vious fiscal crisis has forced policy makers to aggressively pursue a stronger
tax deterrent capability. But the ability to sustain such capacity after initial
successes also depended on their organisational and political ability to forge a
strong administration. In terms of institutional development, the more
autonomous the state, the higher the capacities to deepen its fiscal reforms
and neutralise predatory pressures from corporate and other rent-seeking
interests.60 Conversely, the more dependent states and governments are on
markets and lobbies, the less their ability to improve compliance and the
more constrained are to change distorted and non-horizontal tax policies.61
Therefore, the central question for each country is when leading social,
political and economic incentives allowed for the development of a more
autonomous tax administration capable of implementing an aggressive tax
policy, or when and to what extent was the state able to dictate an inde-
pendent fiscal policy. While it took the Pinochet regime three to four years to
consolidate an autonomous and efficient state, such autonomy was never
fully achieved in Argentina. Chile is the only country in Latin American that
deepened its tax reform and achieved sustainable tax revenues and com-
pliance. Moreover, it also successfully increased revenues after democrati-
sation due, in part, to the elite's ability to overcome political constraints.62
Conversely, Argentina, Bolivia, Colombia, Mexico and Peru did not gen-
erate sustained tax compliance. Reforms stalled after initially impressive re-
sults. Three to four years after reforms were launched in Mexico, Peru and
Argentina, compliance diminished and tax collection stagnated.
One interpretation suggests that that the 1994 Mexican crisis and its spil-
lover affected the reversal in the level of compliance. However, the data for
59 K. Remmer, 'The Politics of Neoliberal Economic Reform in South America, 1980-1994,'

Studies in Comparative International Development 33 (1998), pp. 3-29.
60 B. Geddes, Politician's Dilemma: Building State Capacities in Latin America (Berkeley, 994);
and E. Huber, 'Assessments of State Strength,' in P. Smith, Latin America in Comparative
Perspectives (Boulder, I995). 61 Gillis, 'Tax reform'.
62 D. Boylan, 'Taxation and Transition: The Politics of the 1990 Chilean Tax Reform,' Latin
American Research Review, vol. 31 (I996), pp. 7-31.

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Argentina and Mexico clearly rejects this hypothesis since tax compliance in
both countries reversed at least 8 months before the crisis. The second
argument suggests that the trend in compliance shifted due to the constraints
imposed by electoral politics.63 However, such hypothesis cannot satisfac-
torily account for the stalled compliance, first because tax compliance de-
creased in these two countries at least 24 months before the elections, and
second, because as the Chilean election of i990 demonstrates, tax reform
and the increase in tax burden can be a legitimately contested electoral
issue.64
In sum, tax reforms throughout the region were caused by the severe
economic crisis of the 198os, which led to new political learning. However,
the depth of the crisis partially accounts for the first phase of the reforms.
The severe economic slowdown allowed for the development of favourable
coalitions and the loosening of old restrictions and political constraints.
These reforms achieved only moderate results, stalling after a few years. Only
Chile 'deepened' its tax reform in a second phase. This success is largely
explained by the extent of the tax administration's autonomy, which elicited
the development of modern state capacities.
Optimal tax theory has not addressed the implementation aspects of tax
reform. However 'the politics of implementation' - the ability to develop a
professional and motivated tax agency, insulated from political pressures
and sensitive to optimising enforcement - emerges as a central feature of a
successful tax policy. The development of a sound institutional environment
transcends the organisational dimension and becomes a central political
issue.
63 In 1993 Mexico entered the last part of the sexenio where the positioning of leading
contenders to the PRI nomination affected the political arena. In Argentina Menem's
successful attempt to seek a constitutional amendment to allow him run for re-election
completely dominated the political arena in 1993, and elections were held in early 1995.
64 The election politics hypothesis can be questioned for at least two reasons. First, 8 to
24 months prior to elections are considered an extremely long period for a 'paralysis' on
policy changes. Following this rationale, there are always elections every two years (con-
gress, governors, etc.) and consequently any unpopular policy reform could be possibly
launched during this time. Second, the Chilean case demonstrates precisely that tax reform
could be a legitimately contested electoral issue. Among the salient themes of the multi-
party Concertaci6n platform for the i989 election was a tax reform that called for an
increase of income and consumer taxes in order to address poverty. Both in 1964, at the
end of Alessandri's government when the Christian Democrats appeared about to win the
elections, and in 1990 under a different political constellation, tax issues became central in
pre-election campaigning and post election policy. In both cases the Christian Democrats
(in 1990 as part of the Concertaci6n) launched tax reforms geared towards vertical redis-
tribution, in order to alleviate poverty. When the Concertaci6n took power in early I990,
extensive tax reforms were among the first laws negotiated and passed through congress.
See Boylan, 'Taxation and Transition'.

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The success of Chile vis 'a vis Argentina is explained by the political ca-
pacity of both the Pinochet regime and the first Concertacidn government to
neutralise rent seeking and predatory pressures, leading to the strengthening
of the SII. Under different circumstances, both governments supported
professionalisation of the tax administration authorities, de-politicised the
agency and legislated taxes that relied on friendly enforcement. This was
possible because the resistance and veto power of political opponents were
neutralised by coalitions that understood that horizontal equity and solid
fiscal performance was paramount for the success of the government. While
Pinochet imposed and the Concertadcin accepted the logic of fiscal balance,
no government in Argentina could muster a consensus about the need for
fiscal restraint. Fiscal balance requires steady tax revenues. Therefore, fiscal
responsibility demands a good tax administration.
Deterrence and compliance: a sociological perspectives
Why do people pay tax ? Why has Chile been more successful than Argentina
in inducing its taxpayers to conform to tax laws?
As stated above, tax compliance is explained by deterrence. The in-
dividual's compliance with tax law is based on the subjective perception of
the likelihood of being detected in violation of the law as well as the sub-
jective perception on the severity of punishment.65 Therefore, for tax com-
pliance, deterrence means the individual's subjective perceived odds of being
caught in tax evasion.66 Taxpayers naturally overestimate the probability of
being audited and monitored by the tax agency.67 However, they do not
overestimate such probability at the same rate. Therefore, the likelihood of
detection is mediated by the subjective perception of such apossibility and not necessarily by
the objective levels of law enforcement.
65 Tax compliance entails tangible costs. Those costs have traditionally been measured in
monetary terms. If taxpayer's subjective perception is that the costs of non-compliance
may exceed the costs of full compliance, then, deterrence models will claim that the like-
lihood of non-compliance will decrease. Conversely, the stronger the perception that the
costs of non-compliance are not as high as the costs of compliance, the stronger the
tendency to break the law. Deterrence models are based on two important and distinctive
characteristics. First, they are only relevant to the extent that taxpayers have a subjective
perception of the plausibility of detection and sanction and, secondly, to the extent that the
sanctions may disrupt the normal functioning of a regular behaviour (Ekland-Olson et al.
1984). In other words, sanctions are only effective if the certainty of detection leads to a
punishment that disrupts routine or regular activities. R. Paternoster, 'The deterrent effect
of the Perceived Certainty of Punishment: A Review of the Evidence and Issues,' Justice
Quarterly 4 (1i987), pp. 101-46. 66 Klepper and Nagin, 'Tax Compliance,' pp. 20zo9-40.
67 Jeffrey A. Roth, John Scholz and Dryden Witte (eds.), Taxpayer Compliance. Vol. I: An
Agenda for Research (Philadelphia, 1989); and Cowell, Cheating the Government.

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6 16 Marcelo S. Bergman
Since tax compliance is explained by deterrence, and deterrence is in-

herently subjective, a critical question is how states can enhance deterrence in
order to reduce tax evasion. All things being equal (as are the tax policy, the
1990 macroeconomic conditions, and the tax rates in Argentina and Chile),
the disparities in tax compliance stem from remarkable differences in the
subjective perception of enforcement.
Does tax enforcement induce voluntary compliance? The evidence is
inconclusive.68 Tax compliance is not determined by enforcement but
rather by the way such enforcement is perceived. Thus, the same level of
enforcement may yield different levels of compliance. In Chile, threats are
more credible because taxpayers are socialised in an environment in which
the temptations of free riding are perceived as costly, and therefore, risk
aversion is higher.
For many scholars69 compliance is explained, to a great extent, as a
function of citizens' internalisation of an obligation to conform to tax laws.
Many studies have found compelling evidence, where compliance also cor-
relates with trust, adherence to social norms, and moral obligations to abide
by the law.7o In Argentina and Chile this correlation holds. The level of trust
and approval of institutional performance in these countries is strongly as-
sociated with the rates of compliance. From a I998 analysis of a survey in
Chile71 the association between a factor that includes trust in public insti-
tutions and approval of government agencies is strongly correlated (o.54),
with taxpayers reported willingness to pay more taxes in order to alleviate
poverty.72 In Argentina, the correlation between the question 'I feel a moral
obligation to comply with tax laws' and the willingness to take risks for
understating a standard evasion 0.34 and statistically significant.73 Although
68 J. Andreoni, B. Erard and J. Feinstein, 'Tax Compliance,'Journal of Economic Literature, vol.

35 (1998), pp. 818-6o; K. Beron, H. Tauchen and A. Witte, 'The Effects of Audits and
Socioeconmoic Variables on Compliance,' in Slemrod, Why People Pay Taxes; B. Erard,
'The Influence of Tax audits on reporting Behavior,' in Slemrod, Why People Pay Taxes; and
K. Kinsey, 'Deterrence and Alienation Effects of IRS enforcements: An Analysis of Survey
Data,' in Slemrod, Why People Pay Taxes.
69 J. Scholz and N. Pinney, 'Duty, Fear, and Tax Compliance: The Heuristic Basis of Citi-
zenship Behavior' American Journal of Political Science 39 (1995), pp. 490--5 I2; J. Scholz and
M. Lubell, 'Trust and taxpaying: Testing the Heuristic Approach to Collective Action,'
American Journal of Political Science 42 (1998), pp. 398-417, and P. Webly, H. Robben,
H. Elffers and D. Hessing, Tax Evasion: An ExperimentalApproach (New York, 199 1).
70 Scholz and Pinney, 'Duty, Fear, and Tax Compliance,' pp. 490-512; and J. Carroll, 'How
Taxpayers Think about their Taxes: Frames and Values,' in J. Slemrod, Why People Pay
Taxes.
71 Mori, Investigacidn del Comportamiento de los Contribuyentes Frente a la Oblgadcion Tributaria. SII
(Santiago de Chile, 1998).
72 M. Bergman,'Who Pays for Social Policy? A Study on Taxes and Trust,' Journal of Social
Policy 31:2 (zooz2002); and Mori, Investigacidn del Comportamiento de los Contdbuyentes.
7n AFIP, Estadisticas Tdributadrias (Buenos Aires, I997).

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causation remains unexplained, the association between sociological vari-

ables and compliance suggests that perceptions of risk, detection and pun-
ishment are mediated by a social component.
An evolutionary approach to norm-abidance shows how behavioural
patterns change over time. Taxpayers learn from past experiences and this
affects their tax decisions. The level of corruptions of tax agents in Chile and
Argentina differs greatly. In the former it is virtually impossible to bribe
auditors. The strict enforcement of rules by tax administrators left no mar-
gins for taxpayers to test less costly alternatives. Thus, there are no bail-out
strategies once detection of non-compliance occurs. In Argentina, on the
other hand, taxpayers know that the effectiveness of auditors in detecting
evasion is meagre and that the cost of such detection is lower since bribes
and an ineffective punishment system diminishes the incentives for full
compliance. In other words, taxpayers' voluntary compliance is based on the
credibility of sanctions. I argue that Chile has been more successful in
achieving better tax compliance rates because tax enforcement has been
perceived as more credible.
Cultural perspectives
The cultural perspective on tax evasion relates to the approach and attitudes
of taxpayers in a given society towards the obligation of conforming to the
rules. Clearly Argentina differs from Chile in this respect. The central ques-
tion is why the difference in 'tax culture' emerged. I claim that the culture of
compliance is, to a great extent, the outcome of taxpayers' interaction with
the authorities and the internalisation of the perceived costs of compliance
decisions.
Taxpayers' decision-making is generally the outcome of a routine rather

than a weighed calculation of costs and benefits.74 Tax compliance should be
modelled as interactive games between taxpayers, administration and tax
environment.75
In iterated games, a player decides to cooperate or evade according to the

immediate previous action of another player (in this case the tax agency). The
taxpayer's perception of an audit or the outcome of any other enforcement
measure becomes crucial in enhancing the other player's (the Tax Agency)
credibility of future threats. Therefore, compliance in repetitive games is
74 M. Steenbergen, K. McGraw and J. Scholz, 'Taxpayers' Adaptation to the 1986 Tax Re-
form Act: Do New Tax Laws Affect the Way Taxpayers Think about Taxes ?,' in Slemrod,
Why People Pay Taxes.
75 A. Das-Gupta and D. Mookherjee, Incentives and Institutional Reform in TaxAdministration: An
Analysis of Developing Country Experience (Delhi, 1998).

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determined by the payoffs of the previous round. In short, compliance

becomes a function of the history of the interaction.
Perceptions change according to individuals' tax histories. A poorly
performed audit, that fails to detect underreported income diminishes the
taxpayer's perception of detection. Tax audits in Argentina fail to detect a
significant share of non-compliance. In a survey conducted in 1997 on re-
cently audited taxpayers, 75 per cent of respondents whose returns were
assessed with additional tax liabilities said that the tax auditor had found only
a small or very small share of non-compliance. Moreover, in the same survey,
on a scale of o-ioo, the mean probability of detection for an unreported
income of $ioo,ooo was 42 per cent,76 whereas for a control group of
non-audited taxpayers the same question had a mean of 57 per cent.77
This suggests that audits negatively affect the perceptions of likelihood of
detection.
In addition, tax amnesties feed non-compliance since the individual

pecuniary gains of prior tax evasion are rewarded by the lack of legal penal-
ties, particularly when amnesties are recurrent. Since 1978 Argentina has
passed more than 24 amnesties. In Chile, on the other hand, no major tax
amnesties were enacted.78
The implication is clear. When non-compliance decisions are continually

rewarded by the absence of sanctions (Argentina), those decisions lead to a
non-compliant attitude in which citizens give no weight to the threat of
punishment. Conversely, a tax-compliance attitude may result from social
learning that rewards (materially or psychologically) legal behaviour. This
attitude tends to generate automatic tax-compliance decisions, often irres-
pective of the costs of full compliance.
Since traditionally in Argentina the rewards of non-compliance have vastly
exceeded its associated costs, a general culture of non-compliance thrives
precisely because such non-compliance has generally paid off. In Chile,
conversely, a tax culture developed from a strong centralist state and high
degrees of legitimacy. The individuals' perception is that taxes and other laws
must be obeyed. Since tax administration is moderately efficient, it help
developed this legal culture. Therefore, similar level of enforcement yields
better results. This difference stems from a divergent perception among
76 The question was: 'Suppose that last year your firm underreported i oo,ooo$ in sales. In
your estimation, What are the probabilities that the DGI will detect a good part of such
underreport?'
77 The survey was conducted for the DGI by this author and is still unpublished. The sample
was 400 audited and I5o non-audited taxpayers.
78 The literature on tax amnesties and compliance does not cast any doubt on the negative
association between these two. See Andreoni, B. Erard and J. Feinstein, 'Tax Compliance'.
Recently Das Gupta and Mokherjee, Incentives and Institutional Reform showed how repeated
tax amnesties in India weakened tax compliance.

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taxpayers, who in Chile overestimate the SII's detection capabilities but in

Argentina accurately perceive the DGI's deficiencies.
Public opinion surveys support this assertion. In a 1990 survey in Chile
only 36.5 per cent of respondents endorsed the statement: 'In this country it
is easy to evade taxes.' In a 1992 survey this percentage had already decreased
with 28.6 per cent of respondents agreeing to the same question. In 1990 55.4
per cent agreed that: 'There are people who evade taxes and are proud of it.'
Only 48.5 per cent did so in 1992, confirming the declining trend of non-
compliance and the increasing role of a social sanction against tax evasion.79
In a 1994 survey in Argentina, respondents were asked to choose between
two sentences. a) 'There is no justification for not paying taxes', and
b) 'Sometimes there are reasons for not paying taxes'. A total of 71 per cent
chose b), whereas only 26 per cent chose a). In another question respondents
were presented with the following situation: 'Suppose that one of your
friends has proof that someone is evading taxes and asks you for advice.
Would you recommend that he/she report this tax evader to the auth-
orities?' Only 47 per cent of the valid responses answered yes.
The development of institutional capacities
The nature of enforcement shapes the quality of compliance. I claim that the
Tax administration's policies and enforcement in these countries has differ-
entially affected the level of compliance because, over the years, Chile has
been consistent and more successful in implementing better programmes of
enforcement, resulting in a higher level of perceived threat on the part of
taxpayers. This section describes a number of enforcement measures and
their impact upon tax compliance.
Closure of businesses
An example of a divergent effect of a similar measure is the temporary

closure of businesses. This penalty is administered for violating several tax
rules, particularly non-issuance of invoices. Table 3 shows the number of
closures in the first half of 1990s.
In Argentina there was no significant administrative shift to account for
the reversal in compliance in 1993. Between 1991 and 1994 the number of
inspections remained constant, however, as the table indicates, the number
of closures started to decline again from 1993. Moreover, as figure i and
figure 2 in section 2 show, tax compliance declined while temporary business
79 Reported in J. Etcheberry, 'Metodos para la medici6n de la evasi6n tributaria y para la

medici6n del comportamiento de los contribuyentes,' paper presented at the Poverty and
Inequality in Latin America Conference, Washington, DC, 1993.

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Table 3. Closure of Businesses in Argentina and Chile

Year Chile Argentina
1991 n/a 8, I 57
1992 11,246 17,739
1993 8,905 15,253
1994 9,110 10,965
Source: SII and DGI: Indicadores de Gesti6n.
closures started to decrease. In short, by 1991 tax compliance had increased

until taxpayers gradually recognised the DGI's limited detection capabilities
and its inability to punish effectively.
Conversely, in Chile the same measure is still widely used and has not
changed significantly throughout the period. In addition, while in Argentina
the number of inspectors and inspections increased during the early 1990s,
in Chile they remained constant. Moreover, inspectors in Chile monitor
only a small percentage of targeted businesses."8 This suggests that in Chile
a moderate threat of sanction yields good compliance effects, while in
Argentina strong threats yield poor results.
Audit effcacy
Audits are the most powerful instrument for deterrence. Good audits can
uncover tax evasion and sanction taxpayers severely. Therefore they are the
most important weapon TA's have for establishing a credible threat.
A major difference between Chile and Argentina is the role played by
audits. While in Argentina audits are conceived of as another source of
revenue, in Chile their goal is primarily to enhance compliance. For the DGI,
the only criterion of success of audits is the net revenue raised in additional
assessments. During the I980s and I990s there was no computerised selec-
tion of cases for audits, nor any rigorous comparative analysis of tax returns.
Large taxpayers were predominantly selected for audits because they could
generate additional net revenues. In 1996, the additional assessments result-
ing from I8,ooo audits raised 1.5 per cent of the total tax revenues.
In Chile the potential for additional revenues is also a criterion for audit
effectiveness, however, cases were selected only after computerised and
third-party information was processed and matched. Also, audit selection is
stratified in order to include a segment of small firms. A major advantage
of the Chilean tax administration is the massive computerised checks for
so Reported by Jorge Trujillo, Deputy director of Audits Department of SII. Interview held in
Santiago de Chile August 2, 1996. Since i990, approximately zoo part time inspectors have
been allocated to the duties of invoicing and other formalities control operations. For
Argentina see Duran & Gomez Sabaini 'Lecciones sobre reformas, fiscales en Argentina,'
and also from interview with Horacio Castagnola (see above).

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consistency and accuracy of returns. Since the mid 198os the SII scrutinises
all income tax returns once a year in search of non-compliance.81 During the
198os these checks were conducted strictly in line with internal information
(i.e., information which resulted from the different returns, VAT, income,
property, etc.). In the I990s they also included external information (bank-
ing, stock exchange). Taxpayers recognised the agency's capacity to detect
formal inconsistencies and particularly the SII's ability to detect unreported
sales or overstated deductions. Although this 'Operaci6n Renta' is primarily
concerned with income tax,82 it indirectly spills over into VAT. This clearly
affects taxpayers' subjective estimation of being detected.
During the i98os and i990s there was no similar massive computerised
programme in Argentina. Cross-checks on tax returns were carried out
manually. Since less than i per cent of the returns are audited, taxpayers'
odds of being detected were very low.
Penal sanctions
Penal sanctions are not considered good instruments to enhance compliance.

The severity of sanctions only deters taxpayers when there is a significant
subjective perception about the certainty of being detected.83 In Argentina
the penal deterrence strategy categorically failed.84 More than 10,000ooo cases of
tax evasion were filed in criminal courts between i990 and 1994 with no
direct effects on the level of tax compliance. Until 1997 1,596 cases were
adjudicated by the criminal courts and in only 82 cases did the DGI secure a
favourable resolution."8 Chile averages i oo cases a year of penal prosecutions
for tax evasion with a 90 per cent conviction rate. A strategy of penal sanc-
tions yields optimal results only when it is used in extreme cases in order to
deter major frauds.
Resource allocations for tax enforcement
Tax enforcement is more effective in Chile. The ability of one nation to

develop the administrative capacities to fight tax evasion is determined by
the allocation and deployment of administrative resources.
S8 J. Toro, 'Selecci6n de clientes a fiscalizar'. Paper presented at the CIAT Conference, Paris
Nov 6-10 (1995).
82 Chile's income tax as a percentage of GDP is more than double that of Argentina (see
Table i). Both the tax base and the tax rates do not differ as much in order to explain such
disparity. Clearly, income tax compliance in Chile vastly exceeds the tax compliance in
Argentina. 83 Klepper and Nagin, 'Tax Compliance,' pp. 209-40.
84 M. Bergman, 'Criminal Law and Tax Compliance in Argentina: Testing the Limits
of Deterrence,' International Journal of the Sodciology ofLaw, 26 (1998), pp. 55-74.
s85 Ibid.

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6 22 Marcelo S. Bergman
Table 4. Indicators of Institutional Peformance

No. of inhabitants by tax No. of official for every No. of returns for
Country official GDP percentage point every official'
Argentina 1.890 876 277
Chile 5.183 146 899
1 Active VAT or Income tax
Source: Own elaboration ba
(1998).
A major institutional difference between Chile and Argentina lies in the

organisational structure of the tax administration. In Chile, the treasury
department is in charge of the collection of taxes. The SII's main task is
the administration, control, and enforcement of tax laws.
The DGI, on the other hand, is in charge of audits and controls, as well
as collections. Due to the perennial fiscal constraints and the need to
generate much needed resources, the DGI has prioritised its revenue de-
partment. Unsurprisingly, the revenue-related departments are today more
professional, better equipped and technologically more advanced, compared
to the audit- and regulation-related departments inside the tax adminis-
tration. These organisations create different incentives and operations. While
in Chile the performance of every division is judged according to different
criteria, in Argentina there are no clear boundaries between the collection of
revenue and the level of evasion. Thus, Chile monitors yearly the level of
compliance while in Argentina; there are no systematic studies that monitor
the size of tax evasion. Since the evaluation of performance is measured only
by the amount of revenue raised, the DGI lacks the institutional incentives to
develop a better fiscalisation (audit) and research department.
The cost of collecting $i in Chile is 0.04 cents, in Argentina it costs 1.9
cents. The budget of the SII is 0.07 per cent of the GDP, while in Argentina
it amounts 0.22 per cent of its GDP.86 Table 4 shows some indicators of
performance. Clearly, the results of the SII in the 1990 show a more devel-
oped institutional capacity.
The total number of taxpayers in Argentina is roughly double the number
in Chile. In 1996, the SII employed 7,000 officials compared to 18,ooo in
Argentina. However, only 20 per cent of AFIP87 workforce has been as-
signed to audits and other enforcement activities. In contrast, 5o per cent of
SII's staff engages in audits and other monitoring duties. Thus, Chile has a
better ratio of audit staff per taxpayer than Argentina. This data correlates
with the rates of compliance.
86 Ibid.
87 AFIP (Administraci6n Federal de Ingresos Pt~blicos). The new administration created in
1996 that included the DGI and Customs.

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Tax Reforms and Tax Compliance 62 3
In short, major tax enforcement measures account for some disparities

in tax compliance. Both in Argentina and Chile, significant resources were
devoted to enhancing effectiveness in tax enforcement, but the results for
Argentina were elusive.
During the 1990os Argentina failed to reverse a trend of non-compliance
trend. In spite of tax reforms and a better administration, compliance did
not significantly improve, and the state has been unable to develop a
strong deterrent message over a sustained period of time. Prior decades
of tax inefficiency reinforced such behaviour. Tax evasion and tax avoid-
ance usually paid off because the DGI was unable to detect a considerable
number of tax evaders. In order to reverse this trend, tax agencies need
policies aimed at enhancing a time- and energy-consuming strategy based
on improving their detection capabilities. However, the priority of a
weak state like Argentina was to repeatedly raise revenues at almost any
cost. Tax measures were therefore again aimed at increasing collection
and less energy was directed at changing entrenched taxpayers' behaviour.
This priority also explains the short-lived success in 1992-1993, because
since the efficiency of tax administration did not dramatically improve
during these years, taxpayers soon realised that the dog was all bark and
no bite.
Concluding remarks
States are able to raise taxes and collect them effectively not only because
they legislate optimal tax policies, but also because they are able to sustain
them persistently in order to enhance tax-compliance behaviour among
taxpayers. The comparison of Argentina and Chile indicates that fiscal poli-
cies, macroeconomic conditions and electoral cycles cannot satisfactorily
account for the disparity in the ability to attain an enduring compliance on the
part of taxpayers. The construction of three different indexes has shown that
tax compliance is not only significantly different in these countries, but also
that this disparity has a profound impact on the states' public goods. Dif-
ferences in tax compliance suggest that the ability of states to collect taxes
depends on their ability to enhance voluntary compliance, which stems
greatly from their deterrence capabilities.
In the last few years, many empirical studies have shown a significant
correlation between trust, legitimacy and tax compliance. Although the di-
rection of causality is still debated, the differences between Argentina and
Chile suggest that taxpayers' attitudes towards taxes and enforcement is
significantly divergent. Tax compliance has a cultural component. However,
this should be understood as a routine behaviour which results from the
internalisation of credible threats. The dissimilar behaviour of taxpayers in

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Chile and Argentina indicates that the social construction of beliefs and
expectations in each setting differs greatly.
The effects of deterrence are determined to a large extent by the objective
state's measures and mainly by the taxpayers' subjective perceptions. In
Chile, a moderately efficient tax agency was capable of fostering an image of
being able to effectively detect tax non-compliance, and enhanced a sustained
voluntary compliance behaviour in the long term. Argentina failed precisely
in its attempt to generate solid voluntary compliance because, in the long
run, a successful tax reform requires a strong and an efficient state.
APPENDIX
PVAT: Technically, productivity is defined as the total V

proportion of the GDP divided by the tax Rate. P = (VAT
P= productivity, and T= weighted average of VAT ra
country. For further analysis of many VAT cases see Silv
(1993).
NVC: The estimation of this coefficient is based on the available data pro-
vided by the two tax agencies and the national accounts:
NTR - VATI - VATE
NVC =
PTR - VATI - VATE
Where: NVC = Net Voluntary Compliance

NTR = VAT Net Tax Revenue
VATI = VAT Imports Revenues

VATE = VAT Exports Reimbursements
PTR = Potential Tax Revenue (VAT)
Voluntary Compliance in Argentina i997

(In Thousand of Millions of Pesos)
Gross Potential Revenues (i) 36,500,000
Revenues at Source (2) 17,485,000
Net Potential Revenues (3) 19,01 5,000
Real Net Revenues (4) 4,815,000
Net Voluntary Compliance (5) 25 %
(i) On a taxable 5o per cent GDP base, including V
(2) VAT revenues collected at customs, and not in
(approximately 400,000) companies.
(4) Gross VAT revenues - (2).

(5) (4)/(3).

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Tax Reforms and Tax Compliance: The Divergent Paths of Chile and Argentina

Author(s): Marcelo S. Bergman

Stable URL: https://www.jstor.org/stable/3875313

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Tax Reforms and Tax Compliance:

Tax compliance is, to a large extent, a function of state capacities to collect

Marcelo S. Bergman is a lecturer in the Judicial Studies Division of the Centro de

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Deterrence is a function of government's ability to forge credible threats.

2 M. Allingham and A. Sandmo, 'Income Tax Evasion: A Theoretical Analysis,' Journal of

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internalised compliance. Conversely, Argentina's tax capacities have never

Tax compliance in Chile andArgentina

In order to assess the efficacy of tax agencies, a uniform measure of tax

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Table i. Tax Revenues as a Percentage of GDP I992 and i997

1992 1997 1992 1997

Value Added Tax 8.5 9.16 5.89 6.2

should be based on a systematic comparison

A) VATproductivity index (P/VAT)

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Table 2. PVAT for Argentina and Chile

B) Compliance Coefficent (CC)

Several studies measure VAT compliance comparing the gap generate

14 J. C. Gomez Sabaini, Tax Policy Director 1984-1987. Interview held in Bueno

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Figure i plots the tax compliance coefficients for Chile

C) Index of tax ageng effdiengy or net voluntary compliance

An accurate estimate of real state capadties to enhance volu

17 Many models estimate compliance coefficients. They are based on

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A tale of two countries

Accounting for tax compliance

Tax Compliance correlates with deterrence. Although friendly economic

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risk of detection as very low. Some 82 per cent of respondents reported

23 AFIP, Estudios Sobre Cumplimiento Tributario.

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could account for 'triggering' a reversing trend in compliance,36 and no

The collection of taxes in Chile is characterised by stability and growth.

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38 M. Cassanegra de Jantscher, 'Inflation Adjustment in Chile,' in Bird and Oldman, Taxation

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The development of administrative capacities and compliance

The design of a tax administration capable of ensuring that taxpayers con-

44 For a comprehensive analysis of the tax policy in the transi

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productivity. It was assumed that enforcement would follow. However, as

The development of strong tax agencies depends on both professional

45 Remmer, Military Rule in Latin America.

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interests were insulated from policy-making and policy implementation by

47 Harberger, 'Lessons of Tax Reform'.

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* Timing of reforms. Many of the reforms were implemented earlier in Chile,

Since there is a significant difference in VAT compliance between Chile and

The success of Chile compared to Argentina is associated with the devel-

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The political dimension and the limits of tax reform