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Uruguay’s progressive tax reform : why didn’t it fail?

Uruguay’s progressive tax reform : why didn’t it fail?. Andrés Rius Universidad de la República Uruguay December 11, 2012. The presentation. Introduction: the reform “The battle for the middle class” The weaknesses of “the rich” Implications. The presentation.

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Uruguay’s progressive tax reform : why didn’t it fail?

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  1. Uruguay’s progressive tax reform : why didn’t it fail? Andrés Rius Universidad de la RepúblicaUruguay December 11, 2012

  2. The presentation • Introduction: the reform • “The battle for the middle class” • The weaknesses of “the rich” • Implications

  3. The presentation • Introduction: the reform • “The battle for the middle class” • The weaknesses of “the rich” • Implications

  4. The reform in a nutshell • Eliminated distortionary and low productivity taxes, and ad hoc special regimes • Consolidated indirect taxes into VAT, reduced rates; kept exemptions, and taxes on specific consumptions • Substituted schedular taxes with single, broad-based PIT (IRPF), with dual taxation on income • Unified taxes on corporate profits

  5. A progressive reform, in line with the P.E. and institutionalist literatures • No fiscal crisis but awareness of “social debt” from 2001-02 crisis (pull from expend. side) • Administrative capacity: acceptable and improving • First administration of a left-of-center coalition, with absolute majority in Parliament • Reform launched right after election, with the economy growing fast

  6. More “winners” than “losers”

  7. The presentation • Introduction: the reform • “The battle for the middle class” • The weaknesses of “the rich” • Implications

  8. The battle • Reformers, “supporters” and opposition believed the middle class was going to be or feel hurt • Confirmed by polls: majority of public opinion was against the new PIT • …yet, all professional estimates showed a large majority (more than 80% in some) were going to win or stay the same

  9. The government couldn’t win • Voters can’t compute net outcome of complex reform, have reasons to be skeptical of interested parties, and few will seek advice to find out who’s right • Faced with resulting uncertainty, they look for signals, may favor status quo • Opinions/attitudes of peers and those known to be richer/poorer frame the voters reasoning about what to expect

  10. The government couldn’t win • Politicians assume that being on the side of the “middle class” is a winning strategy (and reformers struggled to remain on that side) • …but everyone thinks (s)he is “middle class”…

  11. We’re all middle class Source: Cruces, Pérez-Truglia, Tetaz (2011) “Biased perceptions of income distribution…”, IZA DP No. 5699, May

  12. The presentation • Introduction: the reform • “The battle for the middle class” • The weaknesses of “the rich” • Implications

  13. Behavior of “the rich” in context

  14. Behavior of “the rich” in context Values, ideas Political strength

  15. The issue • The “rich” (proxied by top 10%) felt correctly that they were going to lose • Why didn’t they develop more decisive and effective opposition? (the nature of “compliance”: ¿convictions or weakness?)

  16. A weak economic elite • ideologically and organizationally divided • sparse personal linkages with the political elite

  17. The party system • Institutionalized: Limits the influence campaign money can buy • Catch-all:augments the cost for politicians of playing “the voice of the injured” (a privileged minority)

  18. The presentation • Introduction: the reform • “The battle for the middle class” • The weaknesses of “the rich” • Implications

  19. Implications (1): cognitive constraints & biases • Progressive reforms can succeed despite public opinion • If everyone feels is “middle class”, the battle can’t be won A progressive agenda will always bring about negative outcome for sectors that are richer than MC but don’t feel that way

  20. Implications (2): cognitive constraints & biases • Perception biases create a “pincer effect”: the rich feel unfairly taxed “as if they were rich”, the poor (less informed) can be mobilized to deffend “the middle class” • If government gets fixated with winning it (bounded rationality of policymakers) may get distracted from key tasks, • But battle has to be fought, with information (biased but not impervious)

  21. Implications (3): “…but it wasn’t lost” • Challenges were limited and handled through the institutions • The government was re-elected with almost the same share of the vote • No anti-reform movement so far • Informing voters, worked • Growth probably helped • … it must be fought, but don’t expect to win it

  22. Implications (4): learning from the weak rich • Ideologically united: debate vertical and horizontal equity, expose “unfair” special treatments (within elites and upper-middle classes), use “consulta pública” • Organizationally united: set up parallel tables for “productive policies” (e.g., tax incentives for investment promotion)

  23. Implications (5): learning from the weak rich • Socially cohesive, inter-married and exclusively schooled elites: the hardest to tackle? Cause of LA’s democracy without redistribution? Use “modernity” demonstration effects? • Weakly institutional & class-based parties: set up a catch-all coalition for progressive tax reform, get support of visible achievers

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