Strategies for Taxing Economic Elites:
The Chilean Experience
Tasha Fairfield
[email protected]
Dept. of International Development
London School of Economics
Research Questions
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
2
Obstacles to Reform
Taxing economic elites will be difficult when either
Investment Power or Political Power is strong
3
Obstacles to Reform
Taxing economic elites will be difficult when either
Investment Power or Political Power is strong
Investment Power
(Structural Power: Block 1977, Lindblom 1982, Przeworski & Wallerstein 1988)
Market-coordinated investment decisions
Source: Perceived threat of reduced investment
3
Obstacles to Reform
Taxing economic elites will be difficult when either
Investment Power or Political Power is strong
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
3
Obstacles to Reform
Sources of Political Power
Relationships
Partisan Linkages
Institutionalized Consultation
Recruitment into Government
Election to Public Office
Informal Ties
Resources
Organization
Expertise
Media Access
Money
4
Reform Strategies
Facilitate modest tax increases
on powerful economic elites
Mechanism
Tempering Elite Antagonism
Mobilizing Public Support
Tax-Side
Attenuating Impact
Obfuscating Incidence
Legitimating Appeals
(Horizontal Equity)
Legitimating Appeals
(Vertical Equity)
Benefit-Side
Compensation
Emphasizing Stabilization
Linking to Popular Benefits
Fiscal
Policy
Domain
5
Reform Strategies
Strategy
Primary Mechanism
Policy Choice /
Technique
Limitations / Drawbacks
Attenuating
Impact
Tempers elite
antagonism
1. Incremental reforms
1-3. Fiscal cost
2. Phase-ins
3. Temporary reforms
3. Over-use undermines
effectiveness
4. Dispersion
4. Antagonizing
multiple groups
Obfuscating
Incidence
Tempers elite
antagonism
1. Low-visibility taxes
Inherently difficult
2. Burden-shifting
2. Uncertain incidence
Legitimating Appeals
1. Mobilize public
support
1. Elite-targeted taxes
2. Anti-evasion reforms,
eliminating exemptions
Politicians may ignore
public opinion
1. Vertical equity
1. Fiscal cost,
May antagonize elites
2. Horizontal equity
2. Tempers elite
antagonism
Emphasizing
Stabilization
Tempers elite
antagonism
Taxes that raise
revenue quickly
Relevant during crisis
Compensation
Tempers elite
antagonism
1. Separate negotiation
2. Inclusion in
reform package
3. Contingent benefits
Potential fiscal cost
1. Requires credible
commitment & capacity to
deliver benefits
4. Earmarking
3. Requires exclusive
executive initiative
4. Budgetary rigidities,
Politically undesirable
Linking to
Popular Benefits
Mobilizes public
support
1. Discursive
2. Inclusion in
reform package
3. Contingent benefits
4. Earmarking
Politicians may ignore
public opinion,
May antagonize elites
3, 4. See above
6
Chile, Argentina & Bolivia
Successful cases of
market-oriented tax reform
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.
But recurrent revenue needs
in 1990s and 2000s
7
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
8
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
9
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
9
Chilean Tax Reforms
Aylwin
1990: CIT, PIT & VAT
increases
Attenuating
Impact
Legitimating
Appeals
Compensation
Emphasizing
Fiscal Discipline
Linking to
Popular Benefits
Temporary
Vertical Equity
No direct tax increases
for 4 years.
Finances Spending
Discursive
Multiple social programs
Top PIT rate cuts; no
direct tax increases
for 4 years.
Prevents fiscal
deficit
1993: Made 1990 CIT
permanent
1995: Excise tax
increases
Frei
Lagos
Vertical Equity
1997: Made 1990 VAT
permanent
Contingent:
Pension Increases
Finances spending
Inclusion:
Education reforms
1998: Anti-evasion
reform
Some measures
temporary
Horizontal
& Vertical Equity
Savings Incentives
Finances spending
Contingent:
Pension increases
2000: Anti-evasion
reform
Phased-In
Horizontal
& Vertical Equity
Sumptuary &
capital gains tax cuts
Finances spending
Discursive:
Lagos’ program of
government
2001: CIT increase
Phased-In
Top PIT rate cuts:
revenue-neutral reform
Finances
compensations
2003: VAT increase
Temporary,
Phased-in
Vertical
Equity*
Tariff reductions
(legislated separately)
Finances spending
& compensations
Discursive:
Health care, targeted social
spending programs
Phased-In
Nationalism
Tax invariability clause
Finances spending
Inclusion:
Student scholarships
Finances spending
Contingent:
Pension increases
Finances
compensations &
popular benefits
Contingent:
Gas tax cuts
2005: Mining tax
2005: Eliminated
57 bis
Bachelet
Finances spending
Vertical Equity
2006: Made 2003
VAT permanent
2008: Restricted homeconstruction VAT benefit
Phased-In
Vertical Equity
Contingent:
Gas & stamp tax cuts:
revenue-neutral reform
12
Chilean Tax Reforms
Aylwin
1990: CIT, PIT & VAT
increases
Attenuating
Impact
Legitimating
Appeals
Compensation
Emphasizing
Fiscal Discipline
Linking to
Popular Benefits
Temporary
Vertical Equity
No direct tax increases
for 4 years.
Finances Spending
Discursive
Multiple social programs
Top PIT rate cuts; no
direct tax increases
for 4 years.
Prevents fiscal
deficit
1993: Made 1990 CIT
permanent
1995: Excise tax
increases
Frei
Lagos
Vertical Equity
1997: Made 1990 VAT
permanent
Contingent:
Pension Increases
Finances spending
Inclusion:
Education reforms
1998: Anti-evasion
reform
Some measures
temporary
Horizontal
& Vertical Equity
Savings Incentives
Finances spending
Contingent:
Pension increases
2000: Anti-evasion
reform
Phased-In
Horizontal
& Vertical Equity
Sumptuary &
capital gains tax cuts
Finances spending
Discursive:
Lagos’ program of
government
2001: CIT increase
Phased-In
Top PIT rate cuts:
revenue-neutral reform
Finances
compensations
2003: VAT increase
Temporary,
Phased-in
Vertical
Equity*
Tariff reductions
(legislated separately)
Finances spending
& compensations
Discursive:
Health care, targeted social
spending programs
Phased-In
Nationalism
Tax invariability clause
Finances spending
Inclusion:
Student scholarships
Finances spending
Contingent:
Pension increases
Finances
compensations &
popular benefits
Contingent:
Gas tax cuts
2005: Mining tax
2005: Eliminated
57 bis
Bachelet
Finances spending
Vertical Equity
2006: Made 2003
VAT permanent
2008: Restricted homeconstruction VAT benefit
Phased-In
Vertical Equity
Contingent:
Gas & stamp tax cuts:
revenue-neutral reform
12
Chile
Anti-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.”
–Pres. Lagos
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?”
–Reform Proposal
Applied to income tax base-broadening measures:
Use of legal tax benefits ~ avoidance ~ evasion ~ morally unacceptable
Fighting evasion, not increasing taxes
“Trojan Horse”
13
Chile
Anti-evasion reform, 2001
Modest success:
The right was in an “absolutely defensive position.”
–Former senate president (interview)
“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)
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
14
Chile
Stock-owner tax benefit elimination, 2005
Opportunity: Competition from the Right over inequality
15
Chile
Stock-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)
15
Chile
Stock-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)
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)
15
Chile
Stock-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)
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)
Success: High salience of inequality during campaign
15
Chile
Stock-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)
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)
Success: High salience of inequality during campaign
“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)
15
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.
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
22
Chile Tax Reforms
Aylwin
1990: CIT, PIT & VAT
increases
Attenuating
Impact
Legitimating
Appeals
Compensation
Emphasizing
Fiscal Discipline
Linking to
Popular Benefits
Temporary
Vertical Equity
No direct tax increases
for 4 years.
Finances Spending
Discursive
Multiple social programs
Top PIT rate cuts; no
direct tax increases
for 4 years.
Prevents fiscal
deficit
1993: Made 1990 CIT
permanent
1995: Excise tax
increases
Frei
Lagos
Vertical Equity
1997: Made 1990 VAT
permanent
Contingent:
Pension Increases
Finances spending
Inclusion:
Education reforms
1998: Anti-evasion
reform
Some measures
temporary
Horizontal
& Vertical Equity
Savings Incentives
Finances spending
Contingent:
Pension increases
2000: Anti-evasion
reform
Phased-In
Horizontal
& Vertical Equity
Sumptuary &
capital gains tax cuts
Finances spending
Discursive:
Lagos’ program of
government
2001: CIT increase
Phased-In
Top PIT rate cuts:
revenue-neutral reform
Finances
compensations
2003: VAT increase
Temporary,
Phased-in
Vertical
Equity*
Tariff reductions
(legislated separately)
Finances spending
& compensations
Discursive:
Health care, targeted social
spending programs
Phased-In
Nationalism
Tax invariability clause
Finances spending
Inclusion:
Student scholarships
Finances spending
Contingent:
Pension increases
Finances
compensations &
popular benefits
Contingent:
Gas tax cuts
2005: Mining tax
2005: Eliminated
57 bis
Bachelet
Finances spending
Vertical Equity
2006: Made 2003
VAT permanent
2008: Restricted homeconstruction VAT benefit
Phased-In
Vertical Equity
Contingent:
Gas & stamp tax cuts:
revenue-neutral reform
12