Omar Sanchez, "Fighting Tax Evasion in Latin America: The Contrasting Strategies of Chile and Argentina." Third World Quarterly 32, 6 (2011): 1107-1125.
Abstract (full text is gated):
In the 1990s both Chile and Argentina embarked on efforts to tackle tax evasion. The strategies they pursued differed substantively: Argentina followed a coercive approach that created an elite audit team endowed with special legal powers, while Chile undertook a less spectacular service-oriented approach that improved the fiscal pact between state and society and enacted tax administration reform. Chile succeeded in permanently lowering tax evasion levels, while Argentina's success was short-lived and evasion levels soon returned to previous heights. Besides important differences in the institutional strength of these countries, the contrasting outcomes can be attributed in no small measure to the different strategies adopted. Their experience can provide some useful lessons in the elusive battle against tax evasion in Latin America.
Tax collection is a problem I keep coming back to in my Latin American politics course. This is a particularly vexing problem because of inequality. If tax evasion is rampant, then too little revenue comes in and the government relies on regressive taxes that hit the poor the hardest, thus exacerbating inequality. The question definitely deserves more scholarly attention.
Chile’s state-building and service-oriented approach was more solid in its foundations. The Chilean tax bureau improved signiﬁcantly its methods for the gathering, management and analysis of tax information while it also made a giant leap in the quality of the services it oﬀered taxpayers. Another element of Chilean success in the ﬁght against evasion rested on moves towards greater transparency in the allocation of public expenditure, making clear to the public how new tax revenues were being spent. SII-sponsored polls conducted in the early 1990s provide evidence for this hypothesis.
The anti-evasion eﬀorts analysed here show that state capacity cannot be readily separated from state legitimacy. Measures that enhance legitimacy contribute to state capacity. In an area like tax collection the goals of public policy cannot be adequately met by detached technocrats. Rather, tax administration output depends on the feedback from taxpayers as consumers of government services. Though not suﬃcient by itself, it stands to reason that a service-oriented approach (the carrot) constitutes an integral part of successfully ﬁghting tax evasion in the developing world.
One problem here is that as Sanchez's historical look at Chile demonstrates, there is a long tradition of minimal corruption as well as technocratic efficiency lacking almost everywhere else. This means the lessons may be difficult to apply--you need the technocratic expertise before you can convince taxpayers to have any confidence. It would also be interesting to have a cross-national comparison of how much governments even try to use an Argentine-style coercive method, or whether policy makers collude with or ignore those who are not paying.