strategies for taxing economic elites: the chilean experience tasha fairfield...
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Strategies for Taxing Economic Elites:The Chilean Experience
Tasha [email protected]
Dept. of International DevelopmentLondon School of Economics
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When can governments increase taxation of economic elites?
How much scope for reform can they create?
Overview
Obstacles to taxing elites investment power & political power
Reform Strategies
Cases from Chile
Research Questions
Obstacles to Reform
Taxing economic elites will be difficult when eitherInvestment Power or Political Power is strong
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Investment Power (Structural Power: Block 1977, Lindblom 1982, Przeworski & Wallerstein 1988)
Market-coordinated investment decisions
Source: Perceived threat of reduced investment
Taxing economic elites will be difficult when eitherInvestment Power or Political Power is strong
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Obstacles to Reform
Investment Power (Structural Power: Block 1977, Lindblom 1982, Przeworski & Wallerstein 1988)
Market-coordinated investment decisions
Source: Perceived threat of reduced investment
Political Power(Instrumental Power: Mills 1956, Miliband 1969)
Deliberate political actions
Sources: Relationships and Resources
Taxing economic elites will be difficult when eitherInvestment Power or Political Power is strong
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Obstacles to Reform
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Obstacles to Reform
Sources of Political Power
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Reform Strategies
Facilitate modest tax increaseson powerful economic elites
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Reform Strategies
Successful cases of market-oriented tax reform
Chile, Argentina & Bolivia
But recurrent revenue needs in 1990s and 2000s
Value-Added Tax Revenue (percent of GDP, average: 1995-1999)
Latin America
Chile Argentina Bolivia EU-15
5.1* 8.0 6.9 6.6 7.2
Sources: Sabaini 2005, SII, DNIAF, SIN, ECTCU 2006
*Includes other consumption taxes as well.
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Chile, Argentina & Bolivia
Income, profits, and wealth are major, under-taxed revenue bases
Differences Between Actual and Predicted Tax Revenue
(percent of GDP, 1990s average)
Latin America Chile Argentina Bolivia
Personal income tax –2.7 –4.0 –4.4 –1.5
Corporate taxes –0.7 –2.4 –1.2 –1.5
Source: Perry et al. 2006, 96. Predictions from regressions based on per capita GDP.
Governments considered increasing direct taxes
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Explaining Tax Policy Outcomes
Chile: marginal increases
Strong business power key reforms off agenda
Argentina: significant increases
Weaker business power more leeway to tax
Bolivia: mixed results
Business power + Popular mobilization
Domestic elites not taxed, but big hydrocarbon royalty increases
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Explaining Tax Policy Outcomes
Chile: marginal increases
Strong business power key reforms off agenda
Sources of Political Power
•Organization
•Partisan Linkages: right parties strong in senate
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Chilean Tax Reforms
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Chilean Tax Reforms
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ChileAnti-evasion reform, 2001
Equity appeals: Vertical: “When you go to buy a kilo of bread, you pay 18% VAT. You
have no trick, no mechanism for paying less. The poor pay all their taxes. And it is just [fair] that the rich pay all their taxes.”
Horizontal: “Tax evasion entails great inequity between those who comply with their tax obligations and those who do not. …from an ethical perspective, no one can oppose an initiative that pursues compliance with the law?”
Applied to income tax base-broadening measures:
–Reform Proposal
–Pres. Lagos
Use of legal tax benefits ~ avoidance ~ evasion ~ morally unacceptable
Fighting evasion, not increasing taxes
“Trojan Horse”
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ChileAnti-evasion reform, 2001
Modest success: The right was in an “absolutely defensive position.”
“The [bill’s] title—evasion—it suggests going after criminals. It’s very difficult to oppose someone who presents that framing”
–Right-party senator (interview)
–Former senate president (interview)
Right abstentions (vs. rejection) in finance committee: “otherwise, President Lagos would have said that the opposition is against combatting tax evasion ”
–Right-party senators (El Mercurio)
Limitations: insufficient to enact reform Significant concessions negotiated with business and right
Voter-party linkages: right draws support from popular sectors through clientelism and charismatic appeals (Luna 2010) minimal electoral impact
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ChileStock-owner tax benefit elimination, 2005
Opportunity: Competition from the Right over inequality
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ChileStock-owner tax benefit elimination, 2005
Opportunity: Competition from the Right over inequality “Inequality, Mr. President, continues. There is a Chile that grows,
but it is for the few, and the great majority have not yet benefited.”
–Pres. Candidate Joaquín Lavín (El Mercurio 5/7/05)
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ChileStock-owner tax benefit elimination, 2005
Opportunity: Competition from the Right over inequality “Inequality, Mr. President, continues. There is a Chile that grows,
but it is for the few, and the great majority have not yet benefited.”
Vertical Equity Appeal: “The infamous article ‘57 bis’ [tax benefit] represents a tremendous
support for inequality. Instead of just talking, why don’t we agree to eliminate ‘57 bis’ in less than 24 hours?”
–Pres. Ricardo Lagos (El Mercurio 5/10/05)
–Pres. Candidate Joaquín Lavín (El Mercurio 5/7/05)
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ChileStock-owner tax benefit elimination, 2005
Opportunity: Competition from the Right over inequality “Inequality, Mr. President, continues. There is a Chile that grows,
but it is for the few, and the great majority have not yet benefited.”
Vertical Equity Appeal: “The infamous article ‘57 bis’ [tax benefit] represents a tremendous
support for inequality. Instead of just talking, why don’t we agree to eliminate ‘57 bis’ in less than 24 hours?”
Success: High salience of inequality during campaign
–Pres. Ricardo Lagos (El Mercurio 5/10/05)
–Pres. Candidate Joaquín Lavín (El Mercurio 5/7/05)
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ChileStock-owner tax benefit elimination, 2005
Opportunity: Competition from the Right over inequality “Inequality, Mr. President, continues. There is a Chile that grows,
but it is for the few, and the great majority have not yet benefited.”
Vertical Equity Appeal: “The infamous article ‘57 bis’ [tax benefit] represents a tremendous
support for inequality. Instead of just talking, why don’t we agree to eliminate ‘57 bis’ in less than 24 hours?”
Success: High salience of inequality during campaign
–Pres. Ricardo Lagos (El Mercurio 5/10/05)
–Pres. Candidate Joaquín Lavín (El Mercurio 5/7/05)
“The opposition accepted things that usually it was not willing to accept so as not to harm the presidential option.”
–UDI Deputy (author’s interview 12/23/05)
Findings and Implications
Argument:•When economic elites have strong political and/or investment power, substantial tax increases are unlikely.
•However, reform strategies can make incremental progressive tax increases feasible.
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Policy Implications:
• Pursue incremental rather than comprehensive reform
• Employ multiple strategies where possible
• Reform design and reform strategies must be tailored to the context at hand
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Chile Tax Reforms