The Fiscal Impact of Trade Liberalization by Luiz Villela, Jerónimo Roca and Alberto Barreix in the book Taxation and Latin American Integration by Vito Tanzi, Alberto Barreix and Luiz Villela (Editors) published by IADB (2008).
“The tax systems of Latin America and the Caribbean (LAC) were set up in the 1960s and 1970s, when most countries were applying importsubstitution policies and barely beginning the processes of commercial and fi nancial opening. Since economic conditions changed substantially in the 1990s, many of these systems do not effi ciently promote trade and investment. The prospects for a far-reaching, hemisphere-wide trade agreement that could permanently change economic structures in LAC are gloomy, given the stagnation of negotiations for the Free Trade Area of the Americas (FTAA). Most countries in the region are pursuing bilateral trade agreements, particularly with more developed economies, in order to expand their access to large external markets. Eventually this strategy will have to be accompanied by signifi cant adjustments to most countries’ tax structures, including both the tax system and its administration. In 2004, for example, about 46 percent of LAC’s trade was with the United States.1 The United States was also the leading source of foreign direct invest ment (FDI) in the region, accounting for 40 percent of total investment in 2005 (ECLAC, 2005a).
Tax Effects of Trade and Financial Liberalization
The intensifi cation of trade and fi nancial liberalization, and the subsequent deepening of economic integration processes, have signifi cant implications for tax policy:
- Providing impetus to sectors with comparative advantages, but also to those that are hard to tax.
- Confi ning sectoral policies to tax incentives policies.
- Posing diffi culties in taxing fi nancial capital, the most mobile production factor.
- Heightening the importance of taxes on international activities…”
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