the fact that wages are usually more stable in the short-run due
to labor market frictions, while companies face a profound negative
impact on profits during a trough.
In the case of domestic and external VAT the difference is
even more pronounced. While domestic VAT revenue is only
slightly affected by the drop in economic activity, external
VAT revenue grew much faster during 2008 but fell by as
much as 34.9% in the third quarter of 2009. Imports in the region
mainly consist of durable (and luxury) goods, while
domestic production satisfies basic consumer needs, which
are generally less elastic. Therefore, a contraction of national
income will likely be reflected in a decreased demand for imported
goods and, consequently, a drop in revenue from taxes
levied on imports. In the Peruvian case, domestic VAT (PIT)
seems to react less to changes in economic activity than external
VAT (CIT).
As argued above, a peculiarity of most Latin American
economies lies in their dependence on commodities exploitation.
In Venezuela, Bolivia, Chile, Colombia, Ecuador, and
Mexico 4 non-renewable commodities and natural resources