Martin Ardanaz

Inequality and Personal Income Taxation The Origins and Effects of Legislative Malapportionment

Why does personal income taxation (PIT) remain relatively low in many developing countries despite a period of democratic advancement and rapid economic growth? This stylized fact is hard to reconcile with standard political economy models of taxation that expect democratic regimes to bring about redistribution in countries that suffer from high inequality. This article argues that the details of political institutions are key to understand why PIT remains low in many developing and unequal countries. In particular, we show how legislative malapportionment may prevent the use of personal income taxes as a major revenue source by skewing the distribution of political power across groups. Malapportionment is usually not exogenous but the result of design by those with political power at the transition or reform moment. As such, it depends on the structure of political and economic power in society. Based on a sample of more than 50 countries between 1990 and 2007, this article finds that (a) countries with historically more unequal distributions of wealth and income tend to systematically present higher levels of legislative malapportionment and (b) higher levels of malapportionment are associated with lower shares of personal income taxes in GDP.

Labor Shortages, Rural Inequality, and Democratization

A large body of scholarship has asserted that inequalities in the distribution of fixed assets act as a barrier to democratic transitions. This article proposes a theoretical and empirical amendment of this finding, by arguing that employment conditions in the countryside, rather than inequalities in the distribution of fixed assets affected electoral outcomes in societies characterized by high levels of rural inequality. Using empirical evidence from the Prussian districts of Imperial Germany during the period between 1871 and 1912, we show that relative labor market shortages of agricultural workers affected electoral outcomes under conditions of an imperfect protection of electoral secrecy. Shortages of agricultural workers reduced the electoral strength of conservative politicians and increased the willingness of rural voters to “take electoral risks” and vote for the opposition Social Democratic Party. Labor shortages also affect preferences of individual legislators over the reform of electoral institutions. We find that politicians in districts experiencing high levels of labor shortage, and thus, higher costs of electoral intimidation are more willing to support changes in electoral rules that increase the protection of electoral secrecy. In theoretical terms, our findings contribute to the literature linking rural inequality and democratization, by demonstrating the importance of labor scarcity as a source of political cleavages over electoral reforms.

Structural Fiscal Balances in Latin America and the Caribbean: New Dataset and Estimations

Over the past decade, an increasing number of countries have began anchoring their fiscal policy frameworks in terms of rules that target the cyclically adjusted or structural (as opposed to actual) balance in an effort to overcome problems of procyclicality and fiscal volatility. The logic for doing so is in principle compelling: rule-based fiscal policies allow automatic stabilizers to work freely during the cycle and help accumulate fiscal surplus in good times. However, the estimation of structural balances is subject to a number of methodological challenges, including the degree of estimation uncertainty. This paper presents a range of estimates of the structural budget balance and uses them to analyze the cyclical behavior of fiscal policy in Latin America and the Caribbean. Based on an original dataset comprising detailed fiscal information from 20 countries across the region between 1990 and 2012, the paper finds that the range of estimates can be large for some countries, especially those that derive substantial fiscal revenue from commodity-related activities. In addition, the evidence shows that on average, the region has followed a procyclical policy pattern: a 1 percent increase in the output gap is associated with up to a 0.66 percentage point deterioration in the structural primary balance. This pattern hides substantial regional heterogeneity: procyclicality is more marked in countries that face large terms of trade shocks, but it can be counteracted by higher institutional quality.

The economic effects of constitutions: do budget institutions make forms of government more alike?

According to an influential theoretical argument, presidential systems tend to present smaller governments relative to parliamentary countries because the separation between those who decide the size of the fiscal purse and those who allocate it creates incentives for lower public expenditures. In practice, however, presidential and parliamentary countries come in many forms. In particular, variation in procedural rules that assign budget prerogatives across the popular branches of government may affect the underlying incentives that differentiate these types of regimes in terms of fiscal outcomes. More specifically, we argue that more hierarchical rules that concentrate budgetary power in the executive relative to the legislature do not only reduce the extent of the common pool problem but also limit the degree of separation of powers, which may have a countervailing effect. Consequently, the effect of the form of government on public expenditures is conditional on specific procedural rules. We test this hypothesis on a broad cross-section of countries and find that presidentialism has a negative impact on government size only when executive discretion in the budget process is low (that is, in a context of separation of powers). However, the negative effect of presidentialism on expenditures vanishes when the executive’s discretion over the budget process is higher. This result, in addition to highlighting that not all budget institutions have the same effect on incentives and outcomes, points out how important it is to go beyond broad characterizations of political institutions for explaining policy outcomes, and more generally, for moving forward the research agenda in constitutional political economy.

El proceso presupuestario de Guatemala y su contribución a la (in)eficiencia del gasto público (2000-2012)

Este trabajo se concentra en un proceso clave en la determinacion de los niveles y la composicion del gasto publico en Guatemala: el proceso presupuestario. Utilizando informacion presupuestaria desagregada a nivel de ministerios y programas del gobierno central en el periodo 2000-2012, el analisis revela que el proceso presupuestario presenta una serie de debilidades que podrian afectar negativamente la eficiencia tecnica y de asignacion del gasto publico. En particular, se observa una importante falta de previsibilidad presupuestaria, medida por las modificaciones que sufre el presupuesto en el transcurso de un mismo ejercicio fiscal (es decir, desde su aprobacion inicial hasta el momento de la ejecucion). Para el periodo analizado, una medida de varianza en la composicion del presupuesto entre su aprobacion e implementacion final se estimo en alrededor del 10%, lo que implica que la composicion del gasto ejecutado, en comparacion con el presupuesto original aprobado, excede dos veces las mejores practicas internacionales. Esta falta de previsibilidad presupuestaria genera, por un lado, un gasto mas volatil en los ministerios y, por el otro, menores niveles de eficiencia en la ejecucion de programas presupuestarios. Por ejemplo, el gasto ejecutado de aquellos ministerios que sufren mayor cantidad de modificaciones durante un mismo ejercicio fiscal es casi tres veces mas volatil que el de los ministerios que padecen menos modificaciones. A su vez, un cambio del 10% en el tamano de un programa aumenta el nivel de subejecucion en medio punto porcentual. La imprevisibilidad presupuestaria, sumada a la excesiva rigidez del gasto (que alcanza en la actualidad un 90% del presupuesto), plantea la necesidad de introducir una serie de reformas institucionales que conduzcan a generar una mejor gestion de las finanzas publicas y, por consiguiente, contribuyan a mejorar la calidad del gasto publico en Guatemala.

Evaluating Fiscal Performance in Latin America and the Caribbean: Structural Balance Estimates from an Original Dataset

In recent years, an increasing number of countries have began anchoring their fiscal policy frameworks in terms of rules that target the cyclically adjusted or structural (as opposed to actual) balance in an effort to overcome problems of procyclicality and fiscal volatility. The logic for doing so is in principle compelling: rule-based fiscal policies allow automatic stabilizers to work freely during the cycle and help accumulate fiscal surpluses in good times. However, the estimation of structural balances is subject to a number of methodological challenges, including the degree of estimation uncertainty. This paper presents a range of estimates of the structural budget balance and uses them to analyze the cyclical behavior of fiscal policy in Latin America and the Caribbean. Based on an original dataset comprising detailed fiscal information from 20 countries across the region between 1990 and 2014, the paper finds that the range of estimates can be large for some countries, especially those that derive substantial fiscal revenue from commodity-related activities. In addition, the evidence shows that on average, the region has followed a procyclical policy pattern: a 1 percent increase in the output gap is associated with up to a 0.55 percentage point deterioration in the structural primary balance. This pattern hides substantial regional heterogeneity: procyclicality is more marked in countries that face large terms of trade shocks, but it can be counteracted by higher institutional quality.

Structural Fiscal Balances Database for LAC: A Tool to Assess Fiscal Performance in the Region

The database allows estimating structural fiscal balances for 20 countries in the region under different assumptions regarding the output gap and commodity structural prices. It is a unique database of its kind since: 1) It takes into consideration the distinct responsiveness of different types of revenues to changes in the output gap: In order to adjust for the impact of the business cycle on revenues, we calculate individual elasticities for each source of revenue (i.e. direct taxes, indirect taxes, revenues from non-renewable resources, etc.). Since the different types of revenues in the region have different sensitivities to changes in the output gap, this disaggregated approach allows for a more fine-tuned adjustment. 2) It includes estimations of SFBs based on output gaps projections available in real time. In addition to giving estimations of the actual SFBs, we provide with estimations of the SFBs that would have resulted should the projections on output gaps available to policymakers at the time of designing fiscal policy (data in real time) have been correct. This is in contrast to much of the existing work on structural fiscal balances that makes only an ex post analysis using actual and revised information on the output gaps. 3) It allows assessing the response of fiscal policy to the business cycle. We provide with measures of the fiscal impulse, assessing not only the actual but also the intentional fiscal stance, as well as the degree of procyclicality of fiscal policy.

El proceso presupuestario y el gasto público en Guatemala (2000-2012)

Este trabajo se concentra en un proceso clave en la determinacion de los niveles y la composicion del gasto publico en Guatemala: el proceso presupuestario. Utilizando informacion presupuestaria desagregada a nivel de ministerios y programas del gobierno central en el periodo 2000-12, el trabajo revela que el proceso presupuestario presenta una serie de debilidades que podrian afectar negativamente la eficiencia asignativa y tecnica del gasto publico. En particular, se observa una importante falta de previsibilidad presupuestaria, medida por las modificaciones que sufre el presupuesto en el transcurso de un mismo ejercicio fiscal (es decir, desde su aprobacion inicial hasta el momento de la ejecucion). Para el periodo de analisis, una medida de varianza en la composicion del presupuesto entre su aprobacion e implementacion final se estimo en alrededor del 10%, lo que implica que la composicion del gasto ejecutado, en comparacion con el presupuesto original aprobado, excede dos veces las mejores practicas internacionales. Esta falta de previsibilidad presupuestaria genera, por un lado, un gasto mas volatil a nivel de ministerios, y por otro, menores niveles de eficiencia en la ejecucion de programas presupuestarios. Por ejemplo, el gasto ejecutado de aquellos ministerios que sufren mayor cantidad de modificaciones durante un mismo ejercicio fiscal es casi tres veces mas volatil que el de los ministerios que sufren menos modificaciones. A su vez, un cambio del 10% en el tamano de un programa aumenta el nivel de subejecucion en medio punto porcentual. La imprevisibilidad presupuestaria, sumada a la excesiva rigidez del gasto (que alcanza en la actualidad 90% del presupuesto), plantea la necesidad de introducir una serie de reformas institucionales que conduzcan a generar una mejor gestion de las finanzas publicas, y por consiguiente, contribuyan a mejorar la calidad del gasto publico de Guatemala.

The Economic Effects of Constitutions: Do Budget Institutions Make Forms of Government More Alike?

According to an influential theoretical argument, presidential systems tend to present smaller governments because the separation between those who decide the size of the fiscal purse and those who allocate it creates incentives for lower public expenditures. In practice, forms of government vary greatly, and budget institutions -the rules according to which budgets are drafted, approved, and implemented- are one (of many) drivers of such variation. This paper argues that under more hierarchical budget rules, presidential and parliamentary systems generate a similar incentive structure for the executive branch in shaping the size of government. This hypothesis is tested on a broad cross-section of countries, presidentialism is found to have a negative impact on government size only when executive discretion in the budget process is low (that is, in a context of separation of powers). However, the negative effect of presidentialism on expenditures vanishes or is even reversed when the executive`s discretion over the budget process is higher. Hence, budget institutions that impose restrictions on the legislature`s ability to amend budget proposals can make political regimes look more alike in terms of fiscal outcomes.