Inequality and Taxation: Evidence from the Americas on how Inequality may Influence Tax Institutions

Tax scholars generally focus on how taxation influences inequality. In this article, we examine how inequality may influence the design and implementation of tax systems. We focus on the societies of the Americas over the 19th and 20th centuries to see how and why institutions of taxation differ across and within countries, and how they evolve over time. We examine North America and Latin America for two major reasons. First, despite the region having the most extreme inequality in the world, the tax structures of Latin America are generally recognized as among the most regressive in the world, even by developing country standards. Second, the colonization and development of the Americas constitute a natural experiment of sorts that students of economic and social development can exploit. The different circumstances meant that largely exogenous differences existed across these societies, not only in national heritage, but also in the extent of inequality. Several salient patterns emerge. The United States and Canada (like Britain, France, Germany and even Spain) were much more inclined to tax wealth and income during their early stages of growth, and into the 20th century, than developing countries are today. Although the United States and Canadian federal governments were similar to those of their counterparts in Latin America in relying primarily on the taxation of foreign trade (overwhelmingly tariffs) and excise taxes, the greater success or inclination of state (provincial) and local governments in North America to tax wealth (primarily in the form of property or estate taxes) and income (primarily in the form of business taxes), as well as the much larger relative sizes of these sub-national governments in North America, accounted for a radical divergence in the overall structure of taxation. Tapping these progressive sources of government revenue, state and local governments in the United States and Canada, even before independence, began directing substantial resources toward public schools, improvements in infrastructure involving transportation and health, and other social programs. In contrast, the societies of Latin America, which had come to be characterized soon after initial settlement by rather extreme inequality in wealth, human capital, and political influence, tended to adopt tax structures that were significantly less progressive in incidence and manifested greater reluctance or inability to impose local taxes to fund local public investments and services. These patterns persisted well into the 20th century, indeed up to the present day.

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