Until the mid-1980s, two state agencies, Comibol and YPFB, accounted for the overwhelming share of government revenues. Besides tin and hydrocarbons, few domestic taxes, such as income taxes or sales taxes, contributed to the national treasury. Tax evasion was widespread, and many businesses were reputed to maintain two sets of accounting books, one authentic and one for government tax collectors. Furthermore, the tax system was extremely complex and involved thousands of different taxes that frequently skewed incentives for producers.

The adoption of a comprehensive tax reform package in May 1986 signaled a radical change in government revenue policy. The government established the Ministry of Taxation, computerized the tax system, collected taxes aggressively, and made jail sentences compulsory for evasion and fraud. In great contrast to the previous tax schedule, the 1986 package established only six taxes. The crux of the new tax system was a 10 percent VAT on the production of all goods and services. The VAT was accompanied by a complementary tax, which essentially functioned as an income tax, exacting 10 percent of income, rents, royalties, dividends, and other sources of income. This cut the top income tax bracket from 30 to 10 percent. The VAT tax, however, was deductible from the income tax, and with both taxes equal to 10 percent, there was little incentive to cheat on the other tax. On the contrary, after 1985 the private sector's concern with receipts began to rectify the tax system.

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Source: U.S. Library of Congress