Christian Daude y Ángel Melguizo Centro de Desarrollo de la OCDE
XXIII Seminario Regional de Politica
Personal Income Tax in LAC vs. OECD, 2008
(% GDP) Income inequality pre/post taxes-transfers, 2000s
(Gini coefficient)
0 10 20 30 40 50 60
Argentina Brazil Chile Colombia Mexico Peru Denmark Finland France Germany Greece Ireland Italy Netherlands Poland Portugal Spain Sweden ted Kingdom
Inequality before taxes and transfers Inequality after taxes and transfers
0.0 2.0 4.0 6.0 8.0 10.0 12.0
RDOM CHL PER ARG MEX BRA SPA FRA GER US
Tax morale in Latin America and OECD countries
(“Do you think cheating on taxes is justifiable?”)
0%
10%
20%
30%
40%
50%
60%
70%
Never Justifiable Justifiable
• Tax policy cannot be analyzed separately from expenditures
‐ Government (inter‐temporal) budget constraint
‐ Political economy: agents may be willing to pay higher taxes if they receive (perceived) more/better public services
• Main approaches
‐ Tax‐benefit analysis : How fiscal policy affects households’ incomes?
e.g. OECD (2008) survey, and OECD (2010)
‐ Laboratory experiments (e.g. Konrad and Morath, 2010)
1 Main hypothesis 2 Empirical analysis
Democracy Fiscal policy
3 Conclusions and policy implications Data
Policy questions
• Support for democracy and political preferences
• Fiscal legitimacy (‘tax morale’)
• Desired level of taxation
• Demand for redistribution (state vs. market)
A brief literature review: Theory
• Social class: five quintiles (middle sectors II‐IV)
• (‐ ) Median voter model (Down, 1957)
• (?) Internalization of distortions (Meltzer and Richards, 1981)
• (?) Ideological domination, no coordination (Przeworski, 2007)
• (?) Other, surveyed in Alesina and Giuliano (2009): individual experience (Piketty, 1995), family and nation values
• Perspectives Of Upwards Mobility hypothesis, POUM ()
• (‐) Past mobility, and future mobility (Benabou and Ok, 2001)
• (?) Temporary effect (Hirschman, 1973)
• Meritocracy (), as highlighted in Alesina and Angeletos (2005)
• Success depends on hard work rather than connections
• A poor person in my country can become rich working hard
• Life chances are independent of origin
• Perceived link tax/benefits (+)
Satisfaction with democracy, perception of corruption, public services (health care, education and pensions)
A brief literature review: Theory
A brief literature review: Empirical analysis for Latin America
• Torgler (2005): Lower ‘tax morale’ due to the tax burden, but also to the lack of honesty, and corruption (LB98 and WVS)
• Gaviria (2007): High demand for redistribution and the weak support for market outcomes: pessimistic views on social justice and equality of opportunities, and past/expected mobility (LB96, 00)
• Marcel (2008): No belief in mobility, weak social contract (crime, job insecurity, and poor health‐care). But, strong beliefs in the value of effort and education, and in shared responsibility state‐individuals, backed by a willingness to pay more taxes (ECosociAL 2007)
1 Main hypothesis 2 Empirical analysis
Democracy Fiscal policy Data
Data
• Latinobarómetro, rounds 2007 and 2008
• Annual public opinion survey
• Data from around 20 thousand interviews and 18 LAC countries
• Perceptions on social, economic and political issues, plus self‐
reported income
• Pros and cons vs. other databases (World Value Survey, Gallup):
Availability, diffusion, previous research
Attitudes towards democracy (% support and satisfaction)
Distribution of political preferences (0 extreme left, 1 extreme right)
Attitudes towards democracy
10%
20%
30%
40%
50%
60%
70%
80%
Support for democracy Satisfaction with functioning of democracy
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
Fre qu en cy
Q1 Q2‐Q4 Q5
Attitudes towards democracy: Support, satisfaction and political spectrum
(1) (2) (3) (4) (5) (6)
Dependent Variable Support for democracy
Support for democracy
Satisfaction with democracy
Satisfaction with democracy
Left‐Right Left‐Right
Estimation Method Probit Probit Probit Probit Ordered
Probit
Ordered Probit
Quintile 2 0.212 0.208 0.070 0.074 0.079 0.089
(0.038)*** (0.038)*** (0.040)* (0.040)* (0.036)** (0.036)**
Quintile 3 0.262 0.256 0.179 0.187 0.139 0.162
(0.038)*** (0.039)*** (0.040)*** (0.041)*** (0.037)*** (0.037)***
Quintile 4 0.213 0.202 0.280 0.295 0.174 0.215
(0.051)*** (0.053)*** (0.053)*** (0.055)*** (0.046)*** (0.048)***
Quintile 5 0.203 0.193 0.505 0.532 0.223 0.287
(0.097)** (0.099)* (0.100)*** (0.102)*** (0.099)** (0.102)***
Perceived past mobility 0.018 ‐0.002 ‐0.014
(0.009)** (0.009) (0.008)*
Perceived future mobility 0.012 0.014 0.025
(0.008) (0.008)* (0.007)***
Observations 13141 13141 12697 12697 10996 10996
Fiscal policy
30 35 40 45 50 55 60
Q1 Q2 Q3 Q4 Q5
"Good Citizens pay their taxes"
(percentage of respondents who agree)
25 30 35 40 45 50
Q1 Q2 Q3 Q4 Q5
"Taxes are too high"
(percentage of respondents who agree)
35 37
"Tax evasion is never justified"
(percentage of respondents who agree)
100
Satisfaction with health services Satisfied Not satisfied No Access
Fiscal policy, tax morale: “Do you think that good citizens should pay taxes?”
2007. PROBIT estimates.
(2) (3) (4) (5) (6) (7) (8)
Satisfaction with democracy 0.069 0.058
(0.02)*** (0.02)**
Satisfaction with health care 0.047 0.019
(0.02)** (0.03)
Satisfaction with education 0.064 0.053
(0.02)*** (0.03)**
Satisfaction with pension system
0.013 ‐0.013
(0.02) (0.02)
Past mobility 0.015 0.015 ‐0.019
(0.01)** (0.01)** (0.01)**
Future mobility 0.014 0.012 0.011
(0.01)** (0.01)** (0.01)
Corruption ‐0.001
(0.00)***
Observations 14116 14116 14116 14116 14116 14116 11486
Pseudo‐R2 0.03 0.03 0.03 0.03 0.03 0.03 0.05
Fiscal policy, tax morale: “Tax evasion is justified”
(2) (3) (4) (5)
Satisfaction with democracy 0.067 0.081
(0.025)*** (0.025)***
Past mobility ‐0.011 ‐0.010
(0.009) (0.009)
Future mobility ‐0.010 ‐0.010
(0.008) (0.008)
Corruption 0.002 0.002
(0.000)*** (0.000)***
Observations 9620 9620 9620 9620
Fiscal policy, desired level of taxation: “Do you think taxes are too high?”
2007. PROBIT estimates
(2) (3) (4) (5) (6) (7)
Satisfaction with democracy ‐0.155 ‐0.134
(0.029)*** (0.029)***
Satisfaction with health care ‐0.115 ‐0.066
(0.027)*** (0.031)**
Satisfaction with education ‐0.109 ‐0.054
(0.027)*** (0.031)*
Satisfaction with pension system ‐0.081 ‐0.038
(0.026)*** (0.027)
Past mobility ‐0.029 ‐0.028
(0.008)*** (0.008)***
Future mobility ‐0.021 ‐0.018
(0.008)*** (0.008)**
Observations 13460 13460 13460 13460 13460 13460
Pseudo‐R2 0.08 0.08 0.08 0.08 0.08 0.08
Fiscal policy, desired level of taxation: “Do you think taxes are too high?”
(1) (2) (3) (4)
Satisfaction with democracy ‐0.142 ‐0.140 ‐0.127 ‐0.122
(0.030)*** (0.030)*** (0.030)*** (0.030)***
Satisfaction with health care ‐0.034 ‐0.033 ‐0.030 ‐0.028
(0.032) (0.032) (0.032) (0.032)
Satisfaction with education ‐0.064 ‐0.063 ‐0.058 ‐0.057
(0.032)** (0.032)** (0.032)* (0.032)*
Satisfaction with pension system ‐0.042 ‐0.038 ‐0.032 ‐0.034
(0.028) (0.028) (0.028) (0.028)
Past mobility ‐0.028 ‐0.027 ‐0.027 ‐0.027
(0.009)*** (0.009)*** (0.009)*** (0.009)***
Future mobility ‐0.019 ‐0.017 ‐0.017 ‐0.016
(0.008)** (0.008)** (0.008)** (0.008)**
Success depends on hard work rather than connections ‐0.098 ‐0.098
(0.028)*** (0.028)***
A poor person in my country can become rich if she works ‐0.051 ‐0.041
(0.030)* (0.030)
Fiscal policy, demand for redistribution: state/market
(1) (2) (3) (4)
Dependent Variable State should
intervene in health
State should intervene in education
State should intervene in pension
Market should solve all problems
Left‐Right 0.037 0.033 0.03 0.002
(0.005)*** (0.005)*** (0.005)*** (0.005)
Distribution of income is fair 0.144 0.143 0.115
(0.030)*** (0.030)*** (0.031)***
Satisfaction with health care 0.197 (0.025)***
Satisfaction with education 0.124
(0.025)***
Satisfaction with pension system 0.145 (0.024)***
Past mobility ‐0.014 ‐0.007 ‐0.007 0.01
(0.007)* (0.007) (0.007) (0.009)
Future mobility ‐0.011 ‐0.011 ‐0.022 ‐0.019
(0.007) (0.007) (0.007)*** (0.008)**
Opportunities independent of origin 0.049 0.074 0.106
(0.026)* (0.026)*** (0.026)***
A poor person can become rich 0.069 0.059 0.029
(0.026)*** (0.027)** (0.027)
Corruption ‐0.001
(0.000)***
Observations 11688 11579 11412 9621
1 Main hypothesis 2 Empirical analysis
Democracy Fiscal policy Data
Conclusions
• Social class doesn’t play a key role in taxation (once controlled for other factors)
• Perspectives of upwards mobility hypothesis is not confirmed
People who perceive a higher past mobility, and forecast a higher future mobility agree to pay (more) taxes
• Meritocracy pays: impacts positively
Those who think perceive living in a meritocracy also think that taxes are not too high
• Perceived link tax/benefits are key. From generic (corruption) to specific (health and education)
Policy implications
• Need to build better institutions (corruption, meritocracy)
• Potential demand for a stronger social contact (no POUM)
• Potential role of the middle sectors (Support of democracy, and politically moderate)
• Double dividends from better public services
Christian Daude y Ángel Melguizo Centro de Desarrollo de la OCDE
XXIII Seminario Regional de PolItica
Results at a glance
Legitimacy Tax are too high More redistribution
Education
+ -
+/-Middle sectors
+
/+-
/--
/-Public services
(educ., health)
+ - +
POUM
+
/+-
-Net payers of the personal income tax
(Percentage of households with labour income)
10.0 20.0 30.0 40.0 50.0 60.0 70.0
MEX CRI CHL ARG URU PER COL
