Taxing Higher Incomes: What Makes the High-Income Earners Consent to More Progressive Taxation in Latin America?

Abstract

When do high-income earners get 'on board' with the fiscal contract and accept paying a larger share of the tax burden? Progressive taxes perform particularly poorly in developing countries. We argue that the common opposition of the affluent to more progressive taxation is not merely connected to administrative limitations to coercively enforce compliance, but also to the uncertainty that high-income earners associate with the returns to taxes. Because coercion is not an option, there is a need to convince high-income earners to 'invest' in the public system via taxes. Trust in institutions is decisive for the fiscal contract. Expecting that paid contributions will be used in a sensible manner, high-income earners will be more supportive of progressive income taxation. We study tax composition preferences of a cross-section of Latin American countries using public opinion data from LAPOP for 2012. Findings reveal that higher levels of trust in political institutions strongly mitigate the opposition of the affluent towards more progressive taxation.

Welfare state structure, inequality, and public attitudes towards progressive taxation

“…There is also evidence that individuals do not necessarily choose the tax system that is most beneficial to their own material advantage, since they may also care about its fairness or general need. Hence even high-income individuals may support a tax system where they have to pay a larger share of their income in taxes than low-income earners (Berens and von Schiller, 2016). The literature on inequality aversion identifies the phenomenon of 'advantageous inequality aversion' or 'altruism' -experiencing utility losses when others have worse economic outcomes -and shows the relevance of this on tax progressivity preferences (Ackert et al, 2007, Lü andScheve, 2014).…”

Party System Institutionalization and Reliance on Personal Income Taxation in Developing Countries

“…The condition for wealthy taxpayers to enter into a fiscal‐exchange agreement and voluntarily accept paying taxes in the absence of strong coercion mechanisms is the expectation of getting something valuable in exchange for taxes (Berens & von Schiller, ). If, as is commonly assumed, taxation equals redistribution, wealthy taxpayers should not expect any benefits from taxation.…”

“…The process leading from revenue collection through to public policy design and implementation to the realization of expected benefits is long and involves many steps (Archer, : 419). Consequently, intertemporal calculations play a crucial role in evaluating the expected utility of paying taxes (Berens & von Schiller, ).…”

Party system institutionalization and reliance on personal income tax: Exploring the relationship using new data

“…This is especially a challenge when facing wealthier taxpayers because they are usually in a better position to resist taxation. As a result, as striking as it might sound, the amount wealthy taxpayers pay in these contexts will depend to a large extent on how much they accept being taxed (Berens and von Schiller 2016).…”

“…Taking this into account, the acceptance of taxes rather than external pressure to pay taxes, should be particularly important in explaining the level of tax contributions paid by wealthy taxpayers (Berens and von Schiller 2016). Looking at tax performance and tax contributions by the wealthy in developing countries from this analytical perspective leads to a shift in approach.…”