Fiscal legitimacy in Latin America Red de Áreas de Estudios e Investigaciones Tributarias CIAT Lima, 23-24 agosto 2016

1. Fiscal legitimacy in Latin America
Angel Melguizo
Head of the Latin American and Caribbean Unit
OECD Development Centre
Red de Áreas de Estudios e Investigaciones Tributarias
CIAT
Lima, 23-24 agosto 2016

2. 2
Fiscal legitimacy in Latin America and OECD
(is cheating on taxes justified? 2010)
0%
10%
20%
30%
40%
50%
60%
70%
América Latina OCDE
Nunca justificable
Justificable
Source: OECD/ECLAC (2011), Latin American Economic Outlook 2012
Motivation I: Fiscal legitimacy is lower in LAC than in OECD …

3. 3
40%
45%
50%
55%
60%
65%
70%
75%
1998 2003 2005 2008 2009 2010 2011 2013 2015
Latin America: Tax evasion is never justified
Source: Latinobarometro
Motivation I: … and some positive trends are reverting

4. 4
Nota: Tweets favorring Neves or Rouseff by location
Source: FT
Neves 48%
Rouseff 52%
Motivation II: Political capital is limited

5. 5
Motivation III: Fiscal legitimacy is relevant for policy-making
• Low tax levels should not be exclusively attributed to non-capable tax
administrations and poor enforcement of the tax code, but also to social
preferences
• Fiscal legitimacy in developing countries is often low, as citizens in
developing countries frequently do not trust that tax revenues are well
spent, making them less willing to pay
 Growth and better administration/enforcement may not be
enough. Additional efforts to improve the taxpayer-government
relationship are needed
Key to identify, measure and estimate the impact of these issues to design
effective policies

6. 6
Empirical strategies
• Key assumption: Tax policy cannot be analyzed separately from expenditures
- Government (inter-temporal) budget contraint
- Political economy: citizens/firms may be willing to pay higher taxes
if they receive (perceived) more/better public services
• Main approaches
-Tax-benefit analysis: Fiscal policy impact on households’ incomes
- Laboratory experiments
- Soft data analysis: Relevance of presenting indicators that engage
with perceptions of citizens

7. 7
Two exercises
• What drives tax morale around the world?
(with C. Daude and H. Gutiérrez). 2013. Hacienda Pública Española /
Revista de Economía Pública, N.207 (4/2013), pp.11-26.
OECD Development Centre working paper version. 2012
OECD (2013), What drives tax morale?. OECD Tax and Development
• Tax morale and perceptions on social mobility, fairness and meritocracy in
Latin America
(with C. Daude). 2014. In A. Tavidze (ed.), Progress in Economics
Research. Vol.28. Nova Publishers. OECD Development Centre working
paper version.

8. 8
Policy questions (3+1)
• Fiscal legitimacy (‘tax morale’)
• Desired level of taxation
• Demand for (ex ante and ex post) redistribution
+ Support for democracy and political preferences

9. 9
Literature: theory (I)
• Social class:
• (- ) 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)

10. 10
Literature: theory (and II)
• 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)

11. 11
Two exercises
• What drives tax morale around the world?
(with C. Daude and H. Gutiérrez). 2013. Hacienda Pública Española /
Revista de Economía Pública, N.207 (4/2013), pp.11-26.
OECD Development Centre working paper version. 2012
OECD (2013), What drives tax morale?. OECD Tax and Development
• Tax morale and perceptions on social mobility, fairness and meritocracy in
Latin America
(with C. Daude). 2014. In A. Tavidze (ed.), Progress in Economics
Research. Vol.28. Nova Publishers. OECD Development Centre working
paper version.

12. 12
1. What drives tax morale around the world?
Do you justify cheating on taxes if you have the chance? 1 (always) – 10 (never),
World Value Survey, circa 2005
55 countries (out of 90); around 52,000 observations

13. 13
0%
20%
40%
60%
80%
100%
Western
and Central
Europe
Eastern
Europe
Asia Africa Latin
America and
Caribbean
Anglosaxon
%ofrespondendtsneverjustifyingcheatingontaxes
Avg Max Min
Tax morale at a glance (% justifying cheating on taxes)
What drives tax morale around the world?

14. 14
y = 0.387x + 7.761
R² = 0.045
5
6
7
8
9
10
1.5 2 2.5 3 3.5 4
TaxMorale
Trust in Government
Panel A
r = 0.2120
p-value: 0.1202
y = 0.211x + 7.986
R² = 0.004
5
6
7
8
9
10
2.5 3 3.5 4 4.5
TaxMorale
Having a democractic political system
Panel B
r = 0.0642
p-value: 0.6415
Correlation between tax morale, trust and democracy
Trust and political values matter …

15. 15
… and demand for redistribution as well
Justification of tax cheating (10: max) vs.
Social class
Justification of tax cheating (10: max) vs.
Demand for redistribution
Source: World Value Survey 2005-2006 Source: World Value Survey 2005-2006
1
1.5
2
2.5
3
3.5
4
4.5
5
3 4 5 6 7 8 9
Justificationforcheatingtaxes
Redistribution role for the government in a democracy
(10: maximum)
1
1.5
2
2.5
3
3.5
4
4.5
5
2 2.5 3 3.5 4 4.5
Justificationforcheatingtaxes Social class (from upper =1 to lower = 5)

16. 16
• Marital status (married/living together; divorced/separated; widow/single)
• Religious (1 = respondent considers herself religious)
• Female (1 = female)
• Educational attainment (1 = no formal education … 9 = university degree)
• Employment status (full-time; part-time; self-employed; retired; housewife; student;
unemployed; other)
• Income quintile (self-perceived relative position)
• Economic problems (1 = cannot save or had to borrow to satisfy needs)
• Support for democracy (having a democratic system is very bad =1 … very good =4)
• Trust in government: confidence in national government (1 none at all – 4 a great deal)
• Redistribution: tax the rich and subside the poor (1 not essential – 10 essential)
• Meritocracy: hard work usually brings a better life (1 = yes; 10 =it is a matter of luck and
connections).
Testing socio-economics and politics

17. 17
Perceptions and socioeconomics
Marginal effects on the probability of reporting high tax morale
(Never justifying tax evasion)
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
Supportfor
Democracy
Age Trust in
Government
Female Religious Educational
Attainment

18. 18
Two exercises
• What drives tax morale around the world?
(with C. Daude and H. Gutiérrez). 2013. Hacienda Pública Española /
Revista de Economía Pública, N.207 (4/2013), pp.11-26.
OECD Development Centre working paper version. 2012
OECD (2013), What drives tax morale?. OECD Tax and Development
• Tax morale and perceptions on social mobility, fairness and meritocracy in
Latin America
(with C. Daude). 2014. In A. Tavidze (ed.), Progress in Economics
Research. Vol.28. Nova Publishers. OECD Development Centre working
paper version.

19. 19
2. Fiscal policy, social mobility and democracy in Latin America
• 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
• Tax morale
• Level of taxes
• Demand for redistribution
• Political attitudes

20. 20
Fiscal policy, social mobility and democracy in Latin America
Fiscal policy
30
35
40
45
50
55
60
Q1 Q2 Q3 Q4 Q5
"Good Citizenspay theirtaxes"
(percentage of respondentswho agree)
25
30
35
40
45
50
Q1 Q2 Q3 Q4 Q5
"Taxesare too high"
(percentage of respondents who agree)
25
27
29
31
33
35
37
Q1 Q2 Q3 Q4 Q5
"Tax evasion isnever justified"
(percentage of respondentswho agree)
0
20
40
60
80
100
Q1 Q2 Q3 Q4 Q5
Satisfaction with health services
Satisfied Not satisfied No Access

21. 21
Fiscal policy, social mobility and democracy in Latin America
Fiscal policy, tax morale: “Do you think that good citizens should pay taxes?”
Good democracies and public services pay (+). No clear POUM
2007. PROBIT estimates.
Additional controls age, gender, education, citizenship, religiosity, head of household, economic problems, income quintile (and
constant)
(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)***

22. 22
Fiscal policy, social mobility and democracy in Latin America
Fiscal policy, desired level of taxation: “Do you think taxes are too high?”
2007. PROBIT estimates
Additional controls age, gender, education, citizenship, religiosity, head of household, economic problems, income quintile (and constant)
(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)**
No POUM. Democracy and good public services may allow higher taxes…

23. 23
Fiscal policy, social mobility and democracy in Latin America
… meritocracy reinforces it: lowers the perception of bearing too heavy taxes
2007. PROBIT estimates. Additional controls age, gender, education, citizenship, religiosity, head of household, economic problems, income quintile (and constant)
(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
hard
-0.051 -0.041
(0.030)* (0.030)
Life chances are independent of origin -0.153 -0.152
(0.029)*** (0.029)***
Fiscal policy, desired level of taxation: “Do you think taxes are too high?”

24. 24
Results at a glance
Legitimacy Tax are too high More redistribution
Education
+ - +/-
Middle sectors
+/+ -/- -/-
Public services
(educ., health)
+ - +
POUM
+/+ - -
Meritocracy n.a. - +
PROBIT modeling. Latinobarómetro 2007 and 2008. All regressions include country, ethnicity, marital status and
employment status
Bold: significant at 5 per cent (at least)
Fiscal policy, social mobility and democracy in Latin America

25. 25
Policy implications
• Potential demand for a stronger social contact (no POUM)
• Need to build better institutions Perceptions on the functioning of
democracy, transparency, corruption, and fairness are important
• Potential role of the middle sectors (‘middle-class’) and socio-economics
(Support of democracy, and politically moderate)
• Double dividends from better public services
- More educated citizens support stronger fiscal policy
- Better services (education and health) may trigger a virtuous circle

26. 26
• The research confirms the potential impact of tax morale in the domestic
resource mobilisation agenda
• Measuring and evaluation of tax morale is limited by data availability:
country coverage, sample size, comparability across regions, questions
• International benchmarking and in-depth country analysis are needed
Way forward: research agenda

27. Gracias
Angel Melguizo
Head of the Latin American and Caribbean Unit
OECD Development Centre
Red de Áreas de Estudios e Investigaciones Tributarias
CIAT
Lima, 23-24 agosto 2016