Paper short abstract:

The paper studies overall banked population rates, formal and informal consumer market trends, and consumption tax performance in Argentina, Brazil and Chile. It illuminates how consumption tax revenue influenced overall levels of tax collection when commodity prices were high and low.

Paper long abstract:

This paper studies how the increase in formal banking participation has led to an increase in the access to (and use of) electronic payments (e.g., credit cards and debit cards), which is positively correlated with higher value-added tax (VAT) collection revenue in Argentina, Brazil and Chile. Since the introduction of VAT in these countries (Argentina and Chile in 1975, Brazil in 1967) it has become an important source of tax revenue. We use fixed-effects regression to test the influence of changes in the banked population and electronic payments on VAT revenue from 2002 to 2014. We find that changes in formal banking participation rates and increased credit card and debit card use are correlated with an increasing percentage of personal consumption from informal (hard to tax) markets into formal (easier to tax) markets. As a result, VAT collection has increased—even though VAT rates did not change and economic growth slowed when the commodity boom ended in 2011.